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Why Is Cadence (CDNS) Up 9.2% Since Last Earnings Report?

A month has gone by since the last earnings report for Cadence Design Systems (CDNS). Shares have added about 9.2% 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 its most recent earnings report in order to get a better handle on the important drivers.

Cadence Q3 Earnings & Revenues Top Estimates

Cadence posted non-GAAP earnings of $1.06 per share in third-quarter 2022, which topped the Zacks Consensus Estimate by 9.3% and increased 32.5% year over year.

Revenues of $903 million surpassed the Zacks Consensus Estimate by 3.8% and increased 20.2% on a year-over-year basis. The top line benefited from continued strength across all segments driven by higher demand for its products. CDNS ended the quarter with a backlog of $5.5 billion.

Driven by strong third-quarter results, the company raised its outlook for 2022. Revenues for the full year are now projected in the range of $3.53-$3.55 billion compared with the earlier guidance of $3.47-$3.51 billion.

Non-GAAP earnings for 2022 are expected in the range of $4.2-$4.24 per share compared with the earlier guidance of $4.06-$4.12 per share.

Performance in Details

In the third quarter, Product & Maintenance revenues (93.7% of total revenues) of $846 million were up 19.9% year over year. Services revenues (6.3%) of $57 million increased 26.7% from the year-ago quarter’s figure.

Geographically, the Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 45%, 17%, 17%, 16% 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%, 29%, 25%, 12% and 12% to total revenues, respectively.

The company’s digital business delivered 22% year-over-year growth in revenues. Digital Full Flow saw robust traction with 13 new customer wins in the third quarter of 2022. The company’s Cadence Cerebrus solution witnessed accelerating momentum and was deployed by several customers, which helped them to improve productivity by approximately 30 times, added the company.

Palladium and Protium (especially Z2 and X2) platforms witnessed continued momentum with many deals wins. The company noted that it won three new clients and 20 repeat orders in the third quarter. Most deal wins came from clients in the hyperscale, AI and high-end mobile customers.

Cadence’s System Design & Analysis Business segment reported 29% year-over-year growth as it expands its presence in Aerospace & Defense and high-tech electronics.

For the third quarter ended, the total non-GAAP costs and expenses increased 13.3% year over year to $547 million.

Non-GAAP gross margin contracted 10 basis points (bps) to 91.5%, but the non-GAAP operating margin was up 370 bps on a year-over-year basis to 39.4% in the quarter under review.

Balance Sheet & Cash Flow

As of Oct 1, 2022, the company had cash and cash equivalents of approximately $1.026 billion compared with $1.03 billion as of Jul 2, 2022.
The company’s long-term debt came in at $647.8 million as of Oct 1, 2022, compared with $348 million as of Jul 2, 2022.

The company generated an operating cash flow of $317 million in the reported quarter compared with the prior quarter’s figure of $325 million. The free cash flow in the quarter under review was $273 million compared with $301 million reported in the previous quarter.
The company repurchased shares worth approximately $150 million in the third quarter.

2022 Outlook Raised

For 2022, the non-GAAP operating margin is forecast in the range of 39.7-40.7% compared with the range of 39.25-40.25% guided previously.

For 2022, operating cash flow is projected to be $1.2 to $1.26 billion. Management expects to utilize the free cash flow to repurchase shares worth approximately $1.05 billion.

For fourth-quarter 2022, revenues are projected in the range of $870-$890 million.

Non-GAAP earnings are expected to be 89-93 cents per share.

Non-GAAP operating margin is projected to be 35% for the fourth quarter. The company expects to repurchase shares for approximately $300 million in the fourth quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

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 a C. 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. Notably, Cadence has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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