Why Is Cadence (CDNS) Up 13.9% Since Last Earnings Report?
A month has gone by since the last earnings report for Cadence Design Systems (CDNS). Shares have added about 13.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Cadence due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Cadence Q3 Earnings & Revenues Top Estimates
Cadence posted non-GAAP earnings of $1.26 per share in third-quarter 2023, which beat the Zacks Consensus Estimate by 4.1% and increased 18.9% year over year.
Revenues of $1.023 billion surpassed the Zacks Consensus Estimate by 1.7% and rose 13.3% on a year-over-year basis. The top line benefited from continued strength across all segments driven by higher customer demand. The company ended the quarter with a backlog of $5.4 billion.
Management also raised full-year guidance on the back of strong third-quarter results. It also highlighted that the design activity continued to be robust owing to transformative generational trends such as AI, hyperscale computing, 5G and autonomous driving. Management also noted that there is an increase in production of 3D-IC and chiplet designs, and more system companies are now building custom silicon, which bodes well.
Cadence added that its comprehensive JedAI Generative AI platform was witnessing continued momentum, with sales of its GenAI solutions having nearly tripled in the last year.
Revenues for 2023 are now projected in the range of $4.06-$4.1 billion. Earlier, management had suggested revenues in the $4.05-$4.09 billion band.
Non-GAAP earnings for 2023 are now expected to be between $5.07 per share and $5.13 per share. Earlier, non-GAAP earnings were anticipated in the range of $5.05-$5.11 per share.
However, non-GAAP operating margin for 2023 is forecast in the range of 41.5-42% compared with 41.2-42.2% band projected earlier. Management continues to envision operating cash flow to be between $1.3 billion and $1.4 billion. It expects to utilize 50% of the free cash flow to repurchase shares in 2023.
For fourth-quarter 2023, revenues are estimated in the $1.039-$1.079 billion band.
Non-GAAP earnings for fourth-quarter 2023 are anticipated to be between $1.30 per share and $1.36 per share.
Non-GAAP operating margin is estimated to be nearly 31% for the fourth quarter. The company expects to repurchase shares worth approximately $125 million in the fourth quarter.
Performance in Details
In the third quarter, Product & Maintenance revenues (94.4% of total revenues) of $966 million rose 14.2% year over year. Services revenues (5.6%) of $57 million came in line with the year-ago figure. Our estimate for revenues from the Product & Maintenance, and Service segments was $941.3 million and $58.7 million, respectively.
Geographically, the Americas, China, Other Asia, Europe, the Middle East and Africa, and Japan contributed 43%, 17%, 19%, 15% and 6%, respectively, to total revenues.
Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, Intellectual Property, and Systems Design & Analysis accounted for 22%, 28%, 26%, 11% and 13% of total revenues, respectively.
Cadence Cerebrus AI-driven solution witnessed accelerating momentum and was deployed by several customers. Broadcom has leveraged Cadence Cerebrus across multiple business units, thereby achieving “impressive quality of results”, noted management.
The Digital IC business witnessed 11 new wins in the reported quarter. It further stated that Imagination Technologies used Cerebrus and other digital full-flow solutions on its latest 5nm GPU design in the cloud to achieve a 20% drop in leakage power.
The verification business increased 18% year over year due to rising complexity of system verification and software bring-up. Palladium and Protium (especially Z2 and X2) platforms witnessed continued traction with many deal wins.
The Custom IC business delivered 15% year-over-year revenue growth. The company further added that Nisshinbo Micro Devices has utilized various Cadence tools, including AI-driven Virtuoso Studio custom IC design platform and Clarity 3D Solver, to enhance design efficiency and ensure consistent product delivery to the market.
Cadence’s System Design & Analysis Business segment reported a 20% year-over-year rise as it expanded its presence beyond electronic design automation.
For the third quarter, total non-GAAP costs and expenses increased 10.2% year over year to $603 million.
Non-GAAP gross margin contracted 90 basis points (bps) to 90.6%. Non-GAAP operating margin expanded 170 bps on a year-over-year basis to 41.1%.
Balance Sheet & Cash Flow
As of Sep 30, 2023, CDNS had cash and cash equivalents of $962 million compared with $874 million as of Jun 30, 2023.
Long-term debt was $648.8 million as of Sep 30, 2023, compared with $648.6 million as of Jun 30, 2023.
Cadence generated operating cash flow of $396 million in the reported quarter compared with the prior quarter’s $414 million. Free cash flow was $374 million compared with $394 million reported in the previous quarter.
It repurchased shares worth $185 million in the third quarter.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
VGM Scores
At this time, Cadence has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cadence has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Cadence belongs to the Zacks Computer - Software industry. Another stock from the same industry, SAP (SAP), has gained 14.1% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.
SAP reported revenues of $8.43 billion in the last reported quarter, representing a year-over-year change of +6.7%. EPS of $1.58 for the same period compares with $1.13 a year ago.
For the current quarter, SAP is expected to post earnings of $1.67 per share, indicating a change of +63.7% from the year-ago quarter. The Zacks Consensus Estimate has changed -4.2% over the last 30 days.
SAP has a Zacks Rank #4 (Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of F.
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