CADENCE DESIGN SYSTEMS INC

Cadence Design Systems, Inc. is a global technology leader that develops computational, AI-driven software, accelerated hardware, and silicon intellectual property products and solutions. The company's customers include semiconductor companies that design and manufacture integrated circuits, as well as systems companies that design and manufacture electromechanical systems containing various types of semiconductor and other electronics. The business is driven by the transformative impact of AI and the increasing complexity of semiconductor and electronic system design, with growth anchored in three key horizons: Infrastructure AI, powered by demand for high-performance computing and AI chips for data centers and hyperscalers; Physical AI, focused on embedding AI into autonomous vehicles, industrial robotics, and automation; and Life Sciences AI, applying AI and computational science to biology. The company's Intelligent System Design strategy focuses on three pillars: Design Excellence, System Innovation, and Pervasive Intelligence.

The company operates in a highly competitive market facing both domestic and international competition. Key competitors named in the filing include Synopsys, Inc., Ansys, Inc. (acquired by Synopsys), Siemens EDA, Keysight Technologies, Inc., Schrödinger, Inc., CEVA, Inc., Altium Limited (acquired by Renesas Electronics Corporation), Zuken, Inc., and emerging players in China such as Huada Empyrean, Xpeedic Technology, X-EPIC, Primarius Technologies, Univista, and Giga Design Automation. Competition is driven by factors including the ability to deliver continuous technological innovation, quality and differentiation of product and service offerings, strength of customer relationships, ability to attract and retain top engineering talent, and potential geopolitical trade restrictions.

The company generates revenue primarily through time-based software licenses, which offer customers the right to access and use products delivered at the outset and updates throughout the term, generally two to three years, with no rights to return. A small portion of software is licensed under perpetual licenses. Hardware products are either sold or leased. Design IP is licensed under nonexclusive agreements providing usage rights for specific designs, with some customers entering into non-cancelable commitments for a fixed dollar amount over a specified period. Revenue is also generated from services including design services, methodology, education, and hosted design solutions. For fiscal 2025, product and maintenance revenue was $4,821.6 million ¹, representing 91% ² of total revenue, while services revenue was $475.2 million ³, representing 9% ⁴ of total revenue. Recurring revenue, which includes revenue recognized over time and other recurring revenue, was 80% ⁵ of total revenue in fiscal 2025, while up-front revenue was 20% ⁶.

The company organizes its offerings into three product categories: Core EDA, Semiconductor IP, and System Design and Analysis. Core EDA encompasses software, hardware, and services essential for the design and verification of semiconductors, including the Virtuoso platform for custom IC design, the Innovus platform for digital IC design and signoff, and functional verification solutions including the Jasper Formal Verification Platform, Xcelium Parallel Logic Simulation Platform, Palladium Enterprise Emulation Platform, and Protium FPGA-Based Prototyping Platforms. In fiscal 2025, the company acquired technology that expands AI-driven design and verification capabilities with advanced agentic AI technology for semiconductor development, and acquired VLAB Works to expand automotive electronic software and hardware development capabilities with virtual prototyping technology. Core EDA contributed 70% ⁷ of total revenue in fiscal 2025.

Semiconductor IP includes strategic design architectures that customers integrate into system-on-chip subsystems and chiplets, spanning PCI Express, Universal Accelerator Link, Compute Express Link, memory interfaces, Tensilica configurable digital signal processors, high-speed SerDes, and Verification IP. In fiscal 2025, the company expanded its design IP portfolio with the acquisition of the Arm Artisan foundation IP business, adding standard cell libraries, memory compilers, and general-purpose I/Os optimized for advanced process nodes. The company also strengthened embedded security capabilities with the acquisition of Secure-IC. Semiconductor IP contributed 14% ⁸ of total revenue in fiscal 2025. System Design and Analysis provides solutions for end-to-end system-level design and verification across chips, packages, PCBs, and complete electronic systems, including the Allegro X and OrCAD X platforms, Sigrity X, AWR, Fidelity CFD, Celsius Thermal Solver, Clarity 3D Solver, Integrity 3D-IC Platform, Optimality Intelligent System Explorer, Reality Digital Twin, and Millennium Enterprise Multiphysics platform. In May 2025, the company announced the M2000 supercomputer, a specialized AI-accelerated platform co-developed with NVIDIA. System Design and Analysis contributed 16% ⁹ of total revenue in fiscal 2025.

During fiscal 2025, the company completed multiple acquisitions including Secure-IC for aggregate purchase consideration of $152.7 million ¹⁰, net of cash acquired of $13.1 million ¹¹; the Arm Artisan foundation IP business from Arm Limited for $128.5 million ¹²; and VLAB Works for aggregate purchase consideration of $126.3 million ¹³, net of cash acquired of $5.2 million ¹⁴. The company also completed three other business combinations for aggregate cash consideration of $38.9 million ¹⁵, net of cash acquired. On September 4, 2025, the company entered into a definitive agreement to acquire Hexagon's Design & Engineering business for aggregate consideration of approximately €2.70 billion ¹⁶, with approximately €1.89 billion ¹⁷ in cash and approximately €810 million ¹⁸ in newly issued shares of Cadence common stock. The company also reached settlements with the Bureau of Industry and Security and the U.S. Department of Justice regarding export control violations, paying aggregate net penalties and forfeitures of $140.6 million ¹⁹ during the three months ended September 30, 2025, and recording a charge of $128.5 million ²⁰ in Loss related to contingent liability. The company repurchased shares of common stock, with payments for repurchases of $925.0 million ²¹ during fiscal 2025. As of December 31, 2025, approximately $1.4 billion ²² of the share repurchase authorization remained available.

Total revenue for fiscal 2025 was $5,296.8 million ²³, compared to $4,641.3 million ²⁴ in fiscal 2024, representing an increase of 14% ²⁵. Net income was $1,108.9 million ²⁶ in fiscal 2025, compared to $1,055.5 million ²⁷ in fiscal 2024. Diluted earnings per share was $4.06 ²⁸ in fiscal 2025, compared to $3.85 ²⁹ in fiscal 2024. Income from operations was $1,492.0 million ³⁰ in fiscal 2025, compared to $1,350.8 million ³¹ in fiscal 2024. Operating margin was 28% ³² in fiscal 2025, compared to 29% ³³ in fiscal 2024. Cash provided by operating activities was $1,728.8 million ³⁴ in fiscal 2025, compared to $1,260.6 million ³⁵ in fiscal 2024.

The company currently expects that its fiscal 2026 effective tax rate will be approximately 27% ³⁶. The company expects that its quarterly effective tax rates will vary from the fiscal 2026 effective tax rate as a result of recognizing the income tax effects of stock-based awards in the quarterly periods that the awards vest or are settled and other items that cannot be anticipated.

The company views AI as a pivotal force driving new opportunities across three key horizons: Infrastructure AI, powered by demand for high-performance computing and AI chips essential for data centers and hyperscalers; Physical AI, focusing on embedding AI into physical systems like autonomous vehicles, industrial robotics, and automation; and Life Sciences AI, applying AI and computational science to biology. The company has integrated cutting-edge technologies including agentic and generative AI, machine learning, and digital twin algorithms into its core products and solutions. The company's Intelligent System Design strategy focuses on three pillars: Design Excellence, leveraging core expertise in AI-driven computational software and accelerated computing; System Innovation, applying AI-driven computational expertise to multiphysics-based analysis of systems; and Pervasive Intelligence, integrating AI training, inference, and reasoning algorithms into products and solutions.

The company is expanding its System Design and Analysis portfolio through the pending acquisition of Hexagon's Design & Engineering business, which is expected to accelerate the Intelligent System Design strategy. The acquisition includes Hexagon's MSC Software division, recognized for industry-leading technologies including MSC Nastran for structural analysis and Adams for multibody dynamics simulation, widely used in aerospace and defense, automotive, robotics, and emerging fields like physical AI. This acquisition is expected to complement the fiscal 2024 acquisition of BETA CAE Systems, further strengthening the company's presence in the multi-billion-dollar structural analysis market. Closing is expected to occur in the first quarter of 2026 ³⁷.

The company expects to continue making significant investments in Research and Development. Research and development expense was $1,768.8 million ³⁸ in fiscal 2025, compared to $1,549.1 million ³⁹ in fiscal 2024, an increase of 14% ⁴⁰. The company expects to continue attracting and retaining talent dedicated to research and development activities through hiring and acquisitions. The company also expects to continue attracting and retaining talent dedicated to technical sales support through hiring and acquisitions.

The company outsources substantially all of the infrastructure relating to its cloud solutions to third-party hosting services. Customers of cloud-based products need to be able to access the platform at any time without interruption or degradation of performance, and the company provides them with service-level commitments with respect to uptime. The company's cloud-based products depend on protecting the virtual cloud infrastructure hosted by third-party hosting services. The company's hardware, including all individual PCBs, custom ICs and FPGA-based prototyping components, is manufactured, assembled and tested by subcontractors before delivery to customers. Software and documentation are primarily distributed to customers by secure electronic delivery.

Research and development spending was $1,768.8 million ⁴¹ in fiscal 2025. Capital expenditures for property, plant and equipment were $141.9 million ⁴² in fiscal 2025. The company repurchased shares of common stock with payments of $925.0 million ⁴³ during fiscal 2025. As of December 31, 2025, approximately $1.4 billion ⁴⁴ of the share repurchase authorization remained available to repurchase shares of common stock. The company has never declared or paid, and does not anticipate declaring or paying in the foreseeable future, any cash dividends on its common stock.

The company is subject to governmental export and import controls that subject it to liability and impair its ability to compete in global markets. U.S. trade control laws and regulations have been amended over the past several years, including through the imposition of certain export control restrictions concerning advanced node IC production in China, the inclusion of additional Chinese technology companies on the Entity List maintained by BIS, and regulations governing the sale and export of certain technologies. On May 23, 2025, BIS informed the company that a license was required for the export, re-export or in-country transfer of EDA Software and Technology when a party to the transaction is located in China or is a Chinese military end user on the Military End-User List, wherever located. On July 2, 2025, BIS informed the company that these license requirements were rescinded effective immediately. The temporary license requirements negatively impacted the company's revenue in China during this period. Effective September 29, 2025, BIS issued an interim final rule that extended export restrictions to entities that are 50% or more owned by sanctioned parties, but on November 11, 2025, BIS published a one-year suspension of the new rule currently set to expire on November 9, 2026 ⁴⁵, absent a future extension.

The company faces risks from uncertainty in the global economy and instability within international relations, including changes in governmental policies relating to technology. The ongoing geopolitical and economic uncertainty between the United States and China, where the company conducts business and has derived a substantial percentage of its revenue, the unknown impact of current and future U.S. and Chinese trade regulations including tariffs and other trade restrictions, and geopolitical risks with respect to Taiwan, which serves as a central hub for the technology industry supply chain, could directly or indirectly materially harm the company's business. The company also faces risks from customer consolidation in the semiconductor industry, which could make the company more dependent on fewer customers who may be able to exert increased bargaining power.

The company faces material risks from governmental export and import controls, including the temporary license requirements imposed by BIS on May 23, 2025 for export of EDA Software and Technology to China, which negatively impacted revenue in China during that period. The company also faces risks from the settlements with BIS and the DOJ regarding export control violations that occurred between 2015 and 2021 involving sales valued at $45.3 million ⁴⁶ in total over that period, for which the company paid aggregate net penalties and forfeitures of $140.6 million ⁴⁷ and entered into a plea agreement with a three-year probationary term. The company faces risks from the cyclical nature of the semiconductor and electronics systems industries, which are characterized by constant technological change, product obsolescence, and wide fluctuations in supply and demand. The company faces risks from customer consolidation in the semiconductor industry, which could make the company more dependent on fewer customers who may be able to exert increased bargaining power. The company faces risks from the highly competitive market, with key competitors including Synopsys, Inc., Ansys, Inc., and Siemens EDA, among others.

Management's message emphasizes the company's position as a global market leader developing computational, AI-driven software, accelerated hardware, and silicon IP products and solutions. The company's mission is to empower the world's most innovative companies to deliver extraordinary electronic products that drive the global economy and improve everyday life. Management highlights the Intelligent System Design strategy focused on three key pillars: Design Excellence, System Innovation, and Pervasive Intelligence. Management notes that the company has integrated cutting-edge technologies including agentic and generative AI, machine learning, and digital twin algorithms into core products and solutions. Management expects that the fiscal 2026 effective tax rate will be approximately 27% ⁴⁸. Management expects that quarterly effective tax rates will vary from the fiscal 2026 effective tax rate as a result of recognizing income tax effects of stock-based awards in the quarterly periods that the awards vest or are settled and other items that cannot be anticipated.