The Zhitong Finance App learned that electronic design automation (EDA) giant Keng Teng Electronics (CDNS.US) announced better-than-expected results for the third quarter of 2026 after the market on Monday and raised its full-year guidance. Morgan Stanley pointed out in a research report released later that Keng Teng Electronics' current performance exceeded expectations and raised guidelines, further enhancing revenue visibility, supporting a record backlog of orders and stronger recurring revenue growth. At the same time, smart AI brings potential commercialization opportunities, although commercial verification is still in its early stages. The bank reiterated its “overholding” rating for Keng Teng Electronics. The target price is $400, which is about 24% higher than the stock's closing price of $322.17 on Monday.
Key performance points
Damo believes that Keng Teng Electronics has once again handed over steady performance, reported a record backlog of orders, and raised its full-year guidance, which further strengthened its growth prospects.
According to the data, Kengteng Electronics' third-quarter revenue increased 22% year-on-year to US$1.63 billion, higher than market expectations of US$1.61 billion. The adjusted operating margin was 44.1%, in line with market expectations; adjusted earnings per share were $2.11, higher than market expectations of $2.05.
Driven by the demand for artificial intelligence (AI) -driven chip design, all major businesses have achieved double-digit revenue growth. Among them, core electronic design automation (EDA) business revenue increased 20% year over year, mainly due to extensive product portfolio growth and increased customer adoption of memory chips and hyperscale data centers. The company also won 16 new digital design and signing full-process projects during the quarter.
Intellectual property (IP) business revenue increased 24% year over year, benefiting from strong demand for interfaces, storage and basic IP products, as well as continued cooperation with large cloud computing companies, semiconductor companies, and foundry foundries. System design and analysis (SD&A) businesses, including Hexagon, performed particularly well, with revenue growth of 30% year-on-year, mainly driven by increased demand for printed circuit boards (PCBs), advanced packaging solutions, and the Millennium platform. The hardware business also hit a new quarterly revenue high, mainly due to the expansion of procurement by large customers and the continued growth of the hardware cloud service business.
In terms of artificial intelligence products, Kengteng Electronics launched the Maestro series of artificial intelligence models specially designed for chip and system design. According to preliminary test results disclosed by the company, compared with the general basic model, Maestro can achieve a quality improvement of up to 30% in some design workflows, while increasing the efficiency of token usage by 5 times. A number of customers have already begun to deploy related products.
In addition, the company's AI Super Agents (AI Super Agents) business continues to advance. Currently, it has carried out more than 100 active customer cooperation projects, covering digital design, simulation and custom design, and system design workflows.
In terms of orders, by the end of the third quarter, Kengteng Electronics' on-hand orders reached a record high of US$8.2 billion, of which the remaining performance obligation revenue confirmed over the next 12 months is estimated to be US$4.2 billion. The company's third-quarter recurring revenue increased 18% year over year, further enhancing the predictability of future revenue.
Looking ahead to the full year of 2026, Keng Teng Electronics' upward guidance is expected to be between $6.387 billion and US$6.417 billion, with a median value of about US$6.402 billion (up about 21% year over year) — better than the market and Morgan Stanley's expectations of US$6.32 billion. The company also expects a full year GAAP operating margin of 28.2% to 29.2%, non-GAAP adjusted operating margin of 44.2% to 45.2%; GAAP diluted earnings per share of $4.84 to $4.90, and non-GAAP adjusted earnings per share of $8.37 to $8.43, leading to a median value of $8.40 — better than market expectations of $8.16 and Morgan Stanley's expectations of $8.35.
Revenue visibility has increased, but the AI contribution of smart devices has not been quantified
Damo pointed out that Keng Teng Electronics' revenue for the third quarter exceeded expectations by about 20 million US dollars, and management said there was no obvious early confirmation or boost of revenue. Fourth-quarter revenue guidance was about $60 million higher than market expectations, supported by a record backlog of orders. Recurring revenue growth accelerated to around 18%.
The hardware business once again set a quarterly record. Although the company did not disclose specific revenue, it added 12 new customers and further deepened partnerships with hyperscale cloud service providers. These new customers suggest that the company's growth was not entirely due to the early release of revenue from existing customers.
Recurring remaining performance obligations (CrPO) of $4.2 billion, about 2.5 times the median value of fourth-quarter revenue guidance, further enhanced revenue visibility. As a result, almost all revenue for the fourth quarter was already covered by backlog orders. Unless there is a macroeconomic shock, it is structurally unlikely that fourth-quarter results will fall short of expectations.
The company hinted during the call that Maestro and AI “superintelligence” are supporting core needs rather than just creating an independent new revenue stream. Damo believes that there are potential signs of early commercialization of intelligent AI in the fourth quarter outlook, but Keng Teng Electronics did not disclose specific AI revenue data.
Intelligent AI: The Economics of Commercialization Between Control and Cooperation Models
Damo pointed out that Keng Teng Electronics and its counterpart Synopsys (SNPS.US) are adopting different commercialization models. Keng Teng Electronics' newly launched Maestro integrates post-trained models, routing capabilities, and reusable agent skills into its proprietary AI agents AuraStack, ChipStack, Innostack, and ViraStack. Self-developed models, customer-specific training, and local deployment capabilities emphasize control and deployment flexibility. Some customers will begin receiving early access in the fourth quarter of 2026. Keng Teng Electronics claims that the technology can improve design quality by up to 30% and increase token efficiency by 5 times. Management also mentioned that the adoption rate of smart devices continues to rise and has brought about a “significant increase in productivity”.
Meanwhile, Synopsys's multi-year collaboration with OpenAI revolved around GPT-Synopsys. This is a dedicated cloud hosting model using revenue sharing and joint commercialization models (link). Customer collaboration has begun, but no official launch date has yet been announced.
Damo said that the core of the investors' debate is whether control and flexibility can surpass the commercial economic benefits brought by cutting-edge model cooperation. Both companies maintain a multi-model strategy and have stated that customer data will not be used to train shared models. Performance, adoption rates, and delivery costs in production environments will continue to be key commercial differentiators.
Hexagon is a major drag on profit margins There is room for improvement in 2027
Last year, Keng Teng Electronics announced the acquisition of Hexagon's design and engineering (D&E) division for 2.7 billion euros. The management of Keng Teng Electronics pointed out that Hexagon is a major drag on incremental profit margins, and the business's contribution to operating profit is expected to be very limited in 2026.
According to reports, amortization expenses rose to about 4.9% of revenue, or 79.9 million US dollars, while the historical normal level was about 1.9%, which means that additional amortization expenses related to this acquisition were about 49 million US dollars. Reorganization expenses are also at a high level, reaching US$42.2 million, accounting for 2.6% of revenue, which also appears to be related to consolidation efforts. The restructuring fee is currently a cash cost, but the scale should gradually decrease as the consolidation is completed. The total amount of additional amortization and restructuring expenses was about US$91 million, accounting for about 5.6% of third-quarter revenue, but Damo expects these potential phased expenses to return to normal next year.
Keng Teng Electronics said that after excluding Hexagon's influence, the incremental profit margin will usually be within the range of 54% to 55%. Despite the drag, the FY2026 non-GAAP operating margin guidance was raised to 44.7%, slightly higher than the previous year. Management expects Hexagon's consolidation initiatives to support improved profit margins in 2027. As a result, Damo believes that an increase in profit margins is likely to follow.