# How Cadence makes money

CXProWealth Business Lens · Cadence (CDNS) · Q3 FY2026

Read from the 10-Q for the period 2026-07-01 to 2026-09-30, filed 2026-10-28 with the SEC (accession 0000813672-26-000121): https://www.sec.gov/Archives/edgar/data/813672/000081367226000121/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $1.6B (+22.0% on the year)
- Operating income: $428.7M (operating margin 26.2%)
- Net income: $289.7M (net margin 17.7%)
- Gross margin: not reported (the company reports expenses by nature: no cost of revenue or gross profit line exists)
- Free cash flow: $361.9M (22.2% of revenue)
- Cash conversion (operating cash flow / net income): 1.46x
- Capital expenditure: 3.8% of revenue

## Where the money goes (Q3 FY2026)

- Product and maintenance → Revenue: $1.5B
- Service → Revenue: $146.0M
- Revenue → Total costs and expenses: $1.2B
- Total costs and expenses → Marketing and sales: $242.5M
- Total costs and expenses → Cost of goods and services sold: $235.6M
- Total costs and expenses → Restructuring: $42.2M
- Total costs and expenses → Research and development: $537.5M
- Total costs and expenses → General and administrative: $113.0M
- Total costs and expenses → Amortization of acquired intangibles: $33.8M
- Revenue → Income from operations: $428.7M
- Income from operations → Interest expense: $30.4M
- Income from operations → Income before provision for income taxes: $398.3M
- Other income (expense), net → Income before provision for income taxes: $10.0M
- Income before provision for income taxes → Provision for income taxes: $118.6M
- Income before provision for income taxes → Net income: $289.7M

## Where the revenue comes from

### Products and services (Condensed Consolidated Income Statements)

| Member | Value | Share |
|---|---:|---:|
| Product and maintenance | $1.5B | 91.1% |
| Service | $146.0M | 8.9% |

The members sum to total revenue.

### Regions (SEGMENT REPORTING - Summary of Revenue by Geography (Details))

| Member | Value | Share |
|---|---:|---:|
| Americas | $709.7M | 43.5% |
| Asia | $674.7M | 41.3% |
| Other Asia | $312.4M | 19.1% |
| Emea | $248.9M | 15.2% |
| Other Americas | $35.6M | 2.2% |

The members do not sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Revenue | $1.6B | 100% |
|   Product and maintenance | $1.5B | 91.1% |
|   Service | $146.0M | 8.9% |
| Product and maintenance | $173.9M | 10.6% |
| Service | $61.8M | 3.8% |
| Marketing and sales | $242.5M | 14.8% |
| Research and development | $537.5M | 32.9% |
| General and administrative | $113.0M | 6.9% |
| Amortization of acquired intangibles | $33.8M | 2.1% |
| Loss related to contingent liability | $0 | 0.0% |
| Restructuring | $42.2M | 2.6% |
| **Total costs and expenses** | $1.2B | 73.8% |
| **Income from operations** | $428.7M | 26.2% |
| Interest expense | ($30.4M) | 1.9% |
| Other income (expense), net | $10.0M | 0.6% |
| **Income before provision for income taxes** | $408.3M | 25.0% |
| Provision for income taxes | $118.6M | 7.3% |
| **Net income** | $289.7M | 17.7% |
| Net income per share - basic (usd per share) | $1 | 0.0% |
| Net Income per share - diluted (usd per share) | $1 | 0.0% |
| Weighted average common shares outstanding - basic (in shares) | 273,748,000 |  |
| Weighted average common shares outstanding - diluted (in shares) | 275,278,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2009 | $1.0B | -$1.6B | -$1.9B | $70.3M | $97.3M | -$27.0M |
| FY2010 | $852.6M | -$123.6M | -$149.9M | $25.6M | $41.3M | -$15.7M |
| FY2011 | $936.0M | -$29.0M | $126.5M | $199.1M | $34.8M | $164.4M |
| FY2011 | $1.1B | $120.4M | $72.2M | $240.3M | $31.4M | $208.9M |
| FY2012 | $1.3B | $211.7M | $439.9M | $316.0M | $36.0M | $280.0M |
| FY2013 | $1.5B | $189.0M | $164.2M | $367.6M | $44.9M | $322.7M |
| FY2015 | $1.6B | $206.6M | $158.9M | $316.7M | $39.8M | $276.9M |
| FY2016 | $1.7B | $285.4M | $252.4M | $378.2M | $44.8M | $333.4M |
| FY2016 | $1.8B | $244.9M | $203.1M | $444.9M | $53.7M | $391.2M |
| FY2017 | $1.9B | $324.0M | $204.1M | $470.7M | $57.9M | $412.8M |
| FY2018 | $2.1B | $396.2M | $345.8M | $604.8M | $61.5M | $543.2M |
| FY2019 | $2.3B | $491.8M | $989.0M | $729.6M | $74.6M | $655.0M |
| FY2021 | $2.7B | $645.6M | $590.6M | $904.9M | $94.8M | $810.1M |
| FY2022 | $3.0B | $779.1M | $696.0M | $1.1B | $65.3M | $1.0B |
| FY2022 | $3.6B | $1.1B | $849.0M | $1.2B | $123.2M | $1.1B |
| FY2023 | $4.1B | $1.3B | $1.0B | $1.3B | $102.3M | $1.2B |
| FY2024 | $4.6B | $1.4B | $1.1B | $1.3B | $142.5M | $1.1B |
| FY2025 | $5.3B | $1.5B | $1.1B | $1.7B | $141.9M | $1.6B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +14.1% (year before +13.5%): steady
- Operating income: +10.5% (year before +8.0%): accelerating
- Net income: +5.1% (year before +1.4%): accelerating
- Free cash flow: +41.9% (year before -10.3%): accelerating

## Operating figures stated in the filing

- Contracted backlog (remaining performance obligations): $8.2B (as of 2026-09-30). "Contracted but unsatisfied performance obligations were $ 8.2 billion as of September 30, 2026, which included $ 0.9 billion of non-cancelable commitments from customers where actual product selection and quantities of specific products or services are to be determined by customers at a later date." (Item 1. Financial Statements)
- Share of backlog expected as revenue in the next 12 months: 58.0% (as of 2026-09-30). "As of September 30, 2026, Cadence expected to recognize 58 % of the contracted but unsatisfied performance obligations, excluding non-cancelable commitments, as revenue over the next 12 months, 40 % over the next 13 to 36 months and the remainder thereafter." (Item 1. Financial Statements)
- Recurring revenue share (quarter): 79.0% (as of 2026-09-30). "Recurring revenue 79 % 82 % 78 % 81 %" (Item 1. Financial Statements)
- Recurring revenue share (quarter): 82.0% (as of 2025-09-30). "Recurring revenue 79 % 82 % 78 % 81 %" (Item 1. Financial Statements)
- Recurring revenue share (trailing twelve months): 78.0% (as of 2026-09-30). "Recurring revenue 78 % 79 % 79 % 80 % 80 %" (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)
- Recurring revenue share (trailing twelve months): 80.0% (as of 2025-09-30). "Recurring revenue 78 % 79 % 79 % 80 % 80 %" (Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations)

## Key insights

### Revenue grew 22.0% but operating profit barely moved

Total costs rose 31.9% against revenue growth of 22.0%, so operating margin fell to 26.2% from 31.8% as the Hexagon deal's costs arrived first.

Revenue was $1.63B against $1.34B a year earlier, while total costs and expenses were $1.20B against $913.4M. Income from operations was $428.7M against $425.4M. The filing names three causes for the lower margin: operating expenses from recent acquisitions, including amortization, "that exceeded incremental revenue", higher contributions to non-profit organizations, and the mix of products and services sold. _(from the filing)_
The pressure sits in a few lines. Amortization of acquired intangibles was $33.8M against $10.2M. Research and development was 32.9% of revenue against 31.6%, and general and administrative 6.9% against 5.8%. Restructuring charges from a plan started in September were $42.2M against $27.4M, equal to 9.8% of this quarter's operating income. _(from the filing)_
The slide is steady, not a one-quarter event. Operating margin was 32.2% in Q4 FY2025, the last quarter before the deal closed in February, then 29.3% in Q1 FY2026, 28.4% in Q2 FY2026 and 26.2% now. Quarterly revenue rose each time, from $1.44B to $1.47B, $1.58B and $1.63B. _(from the filing)_
Below the operating line, other income turned to $10.0M from a $3.6M expense, but the tax rate on pre-tax income rose to 29.0% from 26.9%. Net income rose 0.9% to $289.7M, and diluted earnings per share stayed at $1.05. _(from the filing)_
Analysis: amortization runs on a schedule set when the deal closed, and the filing attributes the higher non-profit contributions to timing, so part of the squeeze is deal accounting and calendar effects the filing itself identifies. The rest, mainly added headcount, has to be earned back through growth in the acquired business or through cost actions such as the September restructuring. _(analysis)_

### Signed backlog of $8.2B exceeds last year's revenue

Contracted backlog of $8.2B is larger than FY2025 revenue of $5.30B, and Cadence expects 58% of it, excluding non-cancelable commitments, to become revenue within a year.

Contracted but unsatisfied performance obligations were $8.2B at the end of September, about five times this quarter's revenue of $1.63B and more than the full FY2025 revenue of $5.30B. The figure includes non-cancelable commitments where customers choose the actual products and quantities later. _(from the filing)_
The backlog comes from how Cadence sells. Most software is licensed for a fixed term that bundles tools, updates and support, and is recognized evenly over that term. The filing counts this, with maintenance, royalties and hardware leases, as recurring revenue: 79% of the quarter against 82% a year earlier, and 78% of the trailing twelve months against 80%. _(from the filing)_
Analysis: with this much revenue contracted in advance, the quarter's flat operating income reads as a question about the cost base rather than about demand. What decides the margin from here is whether costs grow more slowly than a revenue line that is already largely booked. _(analysis)_
The filing cautions that actual amounts and timing can differ from the estimate, "largely due to changes in actual installation and delivery dates, as well as contract renewals, modifications and terminations." Backlog measures contracts signed, not revenue already earned. _(from the filing)_

### Operating cash ran at 1.46 times net income

Operating cash flow of $423.7M was 1.46 times net income of $289.7M, so the deal's non-cash amortization weighs on reported profit more than on cash.

Operating cash flow was $423.7M against $310.7M a year earlier. After $61.8M of capital spending, free cash flow was $361.9M, 22.2% of revenue, above net income of $289.7M, while operating income was nearly unchanged at $428.7M. _(from the filing)_
Analysis: amortization of acquired intangibles, $33.8M in operating expenses against $10.2M a year earlier, charges the income statement for assets paid for when the deal closed; it is not a cash outlay in the quarter. The filing also books amortization of acquired technology inside cost of product and maintenance. That is one reason reported profit and cash generation moved apart. _(analysis)_
Quarterly cash flow is lumpy. Operating cash flow was $355.8M in Q1 FY2026 and $634.9M in Q2 FY2026. The filing ties it to "business levels and the payment terms set forth in our customer agreements", and says time-based licenses are generally invoiced in equal quarterly amounts, though some customers are invoiced annually or in single amounts. _(from the filing)_
Capital spending is rising from a small base: $61.8M, 3.8% of revenue, against $33.7M, 2.5% of revenue, a year earlier. _(from the filing)_

### Competitive edge

- **A large engineering bill on a cheap-to-deliver product** Research and development took 32.9% of revenue while cost of product and maintenance was 11.7% of product revenue, still leaving a 26.2% operating margin.
- **One flow from chip design to the whole system** Cadence sells chip design tools, silicon IP and system simulation as one integrated flow, and buys its way into adjacent domains such as Hexagon's design business.
- **No dominant customer, and three regions of scale** No single customer reached a tenth of revenue, and the Americas, Asia and EMEA brought 43.5%, 41.3% and 15.2% of the quarter's sales.

### What to watch

- **China sales hang on export policy, not just demand** A US rule extending export limits to companies owned half or more by listed entities is suspended, and a brief license requirement on EDA software hurt China revenue last year.
- **Export-control probation reaches into future acquisitions** Cadence is on probation under a guilty plea over past sales in China, and its compliance obligations extend to every business it acquires, the core of its expansion strategy.
- **Integration costs and inherited security gaps** Restructuring of $42.2M and amortization of $33.8M already weigh on margin, and the filing warns acquired companies often bring weaker security that takes time to align.

## Investor view

**Revenue grew 22.0% while operating income stood nearly still, as Hexagon's design business arrived with its costs first**

### How it makes money

Cadence sells the tools that chip and electronics companies use to design and verify their products: "computational, AI-driven software, accelerated hardware, and silicon intellectual property." It groups them as Core EDA, Semiconductor IP and System Design and Analysis. Product and maintenance revenue was $1.49B of the quarter's $1.63B, 91.1% of the total. Services, $146.0M, are the rest. _(from the filing)_
Most revenue comes from time-based software licenses recognized evenly over the contract, plus maintenance, royalties and hardware leases. The filing calls this recurring revenue: 79% of the quarter. The rest is up-front, recognized at delivery and "primarily generated by our sales of hardware products, individual IP licenses and SD&A software licenses" with terms longer than a year. _(from the filing)_
Much of the coming year is already signed. Contracted but unsatisfied performance obligations were $8.2B at the end of September, more than all of FY2025 revenue of $5.30B. Excluding non-cancelable commitments whose products customers have yet to choose, the company expects to recognize 58% of that backlog as revenue over the next year. _(from the filing)_
The largest cost is engineering. Research and development was $537.5M, 32.9% of revenue, more than cost of product and maintenance ($173.9M) and marketing and sales ($242.5M) together. Because a software tool costs little to deliver once written, the quarter still left an operating margin of 26.2% and free cash flow of $361.9M, 22.2% of revenue. _(from the filing)_

### What shifted

Revenue rose 22.0% to $1.63B from $1.34B a year earlier. Product and maintenance grew 23.2% to $1.49B and services 11.3% to $146.0M. The filing credits "existing customers’ continued investment in complex designs" and revenue from recent acquisitions, chiefly the design and engineering business bought from Hexagon in February, booked mostly in System Design and Analysis. _(from the filing)_
Costs grew faster than sales. Total costs and expenses rose 31.9% to $1.20B, so operating income rose only 0.8% to $428.7M and operating margin fell to 26.2% from 31.8%. The filing gives three reasons: operating expenses from recent acquisitions, including amortization, "that exceeded incremental revenue", higher contributions to non-profit organizations, and the mix of products sold. _(from the filing)_
The increase sits in specific lines. Amortization of acquired intangibles was $33.8M against $10.2M. General and administrative was $113.0M against $78.0M, 6.9% of revenue from 5.8%. Research and development was $537.5M against $423.0M, 32.9% of revenue from 31.6%. Restructuring charges, this quarter from a plan started in September, were $42.2M against $27.4M. _(from the filing)_
Below operating income, other income swung to $10.0M from a $3.6M expense, but the tax rate on pre-tax income rose to 29.0% from 26.9%. Net income was $289.7M, up 0.9%. Diluted earnings per share were $1.05 in both years, on a diluted share count of 275.3M against 273.8M. _(from the filing)_
The mix tilted toward up-front sales. Recurring revenue was 79% of the quarter against 82% a year earlier, and 78% over the trailing year against 80%. The filing ties growth in the United States and EMEA to "our ability to deliver our hardware offerings" and to software demand. Asia was $674.7M, 41.3% of revenue, the Americas $709.7M, 43.5%, and EMEA $248.9M, 15.2%. _(from the filing)_

### Risks in the filing

Economic and political uncertainty can reduce the number of new chip designs and customers' research budgets, which is what Cadence's revenue depends on. The company names tariffs, armed conflicts in the Middle East and Ukraine, tension between the United States and China, and risks around Taiwan, described as "a central hub for the technology industry supply chain." _(from the filing)_
Export controls can block sales. The filing recounts that the US briefly required licenses for EDA software exports to China last year before rescinding the requirement, and that this "negatively impacted our revenue in China." It warns such limits could return, and that trade restrictions push customers toward foreign competitors, open source tools or their own solutions. _(from the filing)_
Cadence pleaded guilty to one count of conspiracy to violate export controls over past sales to a customer in China, and is on probation with audit, reporting and compliance duties. The filing says a breach could bring "denial of export privileges," and that the obligations extend to businesses it acquires, which could limit future acquisitions. _(from the filing)_
Cyberattacks. The company disclosed that a threat actor obtained a limited amount of test, configuration and source code files earlier this year, which it describes as not material, with no operational disruption. It warns that companies it acquires often have less sophisticated security and take time to bring up to its standards. _(from the filing)_
Of these, the acquisition side is the one the numbers already show: integration cost, amortization and the added headcount explain why operating income stood still while revenue grew. The China risks do not appear in this quarter's totals, and that is their nature: they turn on policy decisions rather than on customer demand, so they show up suddenly when they show up at all. _(analysis)_

## Founder view: mechanisms

### Term licenses make revenue visible

Cadence sells most of its software as time-based licenses that bundle the tools, updates and support for a fixed term, often invoiced in equal quarterly amounts, and lets customers remix among products inside the contract. Revenue is recognized evenly over the term, so each quarter mostly replays contracts signed earlier. The customer gets a predictable cost and flexibility; Cadence gets a backlog it can plan hiring against. _(analysis)_

### Heavy engineering on a product that costs little to deliver

Cadence spends more on research and development than on any other line, because chips get harder to design with every process generation and customers pay for tools that keep up. Once written, a tool costs almost nothing to deliver to the next customer. The engineering bill is a fixed cost spread over a growing installed base, so margins widen when revenue grows faster than the engineering team. _(analysis)_

### Buying the next design domain

Cadence's intelligent system design strategy reaches from chip design into the systems around chips: boards, packages, mechanical and multiphysics simulation. Rather than build each tool, it buys businesses that already lead a domain, such as BETA CAE and now Hexagon's design and engineering unit, and sells them to the same engineering buyers. The cost lands at once in amortization, headcount and integration; the revenue builds over years. _(analysis)_

### Hardware and IP deepen the customer's commitment

Alongside licenses, Cadence sells emulation and prototyping hardware and licenses silicon IP blocks that customers build into their chips. Both are recognized at delivery, cost more to produce than software, and swing with customers' chip programs. They tie the customer more tightly to the Cadence flow and bring royalties later, at the price of lumpier revenue and a heavier cost of goods. _(analysis)_

## Member research

Signed-in members read, on the page: what Cadence's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Cadence 10-Q for the period to 2026-09-30: https://www.sec.gov/Archives/edgar/data/813672/000081367226000121/ (2026-10-28)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02