Cadence (CDNS) Down 5% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Cadence Design Systems (CDNS). Shares have lost about 5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cadence due for a breakout? 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 drivers.

Cadence Q1 Earnings & Revenues Top Estimates

Cadence Design Systems posted non-GAAP earnings of $1.17 per share in first-quarter 2022, which topped the Zacks Consensus Estimate by 15.8% and increased 41% year over year.

Revenues of $902 million surpassed the Zacks Consensus Estimate by 5% and increased 23% on a year-over-year basis. The top line benefited from continued strength across all segments driven by broad-based demand for its products. CDNS ended the quarter with a backlog of $5.1 billion.

Driven by strong first-quarter results, the company raised its outlook for 2022. Revenues for the full year are now projected in the range of $3.395-$3.435 billion compared with the earlier guidance of $3.32-$3.38 billion.

Non-GAAP earnings for 2022 are expected in the range of $3.89-$3.97 per share compared with the earlier guidance of $3.70-$3.80 per share.

Performance in Details

In the first quarter, Product & Maintenance revenues (93.8% of total revenues) of $846 million were up 21% year over year. Services revenues (6.2%) of $56 million increased 51.4% from the year-ago quarter’s figure.

Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 47%, 16%, 18%, 14% and 5%, respectively, to total revenues in the quarter under review.

Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, IP and Systems Design & Analysis contributed 22%, 27%, 28%, 13% and 10% to total revenues, respectively.

The company’ s digital and signoff business delivered 23% year-over-year growth in revenues. Digital Full Flow saw robust traction with 15 new customer wins. The company’s Cadence Cerebrus solution witnessed accelerating momentum and was deployed by several customers.

Palladium and Protium (especially Z2 and X2) platforms witnessed continued momentum with many deal wins. The company noted that it won 10 new clients and 50 repeat orders in the first quarter which included more than half for both the platforms. Most of the deal wins came from clients in the hyperscale, AI/ML and networking domains.

In 2021, Cadence introduced 13 new products, including Cadence Helium Virtual and Hybrid Studio, Midas Safety platform and Allegro X.

Cadence’s System Design & Analysis Business reported 22% year-over-year growth.

In the quarter under review, total non-GAAP costs and expenses increased 10.7% year over year to $505 million.
    
Non-GAAP gross margin expanded 30 basis points (bps) to 90.7%, but the non-GAAP operating margin was up 590 bps on a year-over-year basis to 44% in the quarter under review.

Balance Sheet & Cash Flow

As of Apr 2, 2022, the company had cash and cash equivalents of approximately $1.135 billion compared with $1.089 billion as of Jan 1, 2022.

The company’s long-term debt came in at $347.8 million as of Apr 2, 2022, compared with $347.6 million as of Jan 1, 2022.

The company generated an operating cash flow of $337 million in the reported quarter compared with the prior quarter’s figure of $216 million. Free cash flow in the quarter under review was $319 million compared with $201 million reported in the previous quarter.

The company repurchased shares worth approximately $250 million in the first quarter.

2022 Outlook Raised

For 2022, the non-GAAP operating margin is forecast in the range of 38.5-40% as against the range of 37.5-39% guided previously.

For 2022, operating cash flow is projected to be $1.19-$1.29 billion. Management expects to utilize 50% of the free cash flow generated to buy back shares for the year.

For second-quarter 2022, revenues are projected in the range of $825-$845 million.  Non-GAAP earnings are expected in the range of 95-99 cents per share.

Non-GAAP operating margin is forecast between 39-40% for the second quarter. The company expects to repurchase shares for at least $200 million in the current quarter.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

The consensus estimate has shifted 19.12% due to these changes.

VGM Scores

At this time, Cadence has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, 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 trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Cadence has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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