It has been about a month since the last earnings report for Cadence Design Systems (CDNS Quick QuoteCDNS - Free Report) . Shares have lost about 4% in that time frame, underperforming 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 Earnings and Revenues Beat Estimates in Q1

Cadence Design Systems posted first-quarter 2021 non-GAAP earnings of 83 cents per share, which topped the Zacks Consensus Estimate by 12.2%. Also, the bottom line increased 38.33% year over year.

Revenues of $736 million surpassed the Zacks Consensus Estimate by 2.4% and increased 19% on a year-over-year basis.

Revenue growth was benefitted by continued strength across all segments as well as some earlier-than-expected hardware sales.

Performance in Details

Product & Maintenance revenues (95% of total revenues) of $699 million increased 20% year over year.

Services revenues (5%) of $37 million increased 2.8% from the year-ago quarter’s figure.

Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 46%, 12%, 18%, 18% and 6%, respectively, to total revenues.

Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, IP and Systems Design & Analysis contributed 23%, 27%, 26%, 14% and 10% to total revenues, respectively.

Cadence Digital Full Flow saw robust traction in the first quarter along with Palladium Z1 and Protium X1.

In the first quarter, the company unveiled that Cadence Palladium Z2 Enterprise Emulation and Protium X2 Enterprise Prototyping systems. provide two times more capacity and offer 1.5 times improved performance than the prior generation — Palladium Z1 and Protium X1. These solutions are embedded with next-generation emulation processors and Xilinx UltraScale+ VU19P FPGAs.

In April 2021, Cadence acquired Pointwise, which specializes in mesh generation for computational fluid dynamics (CFD). The company’s solutions are being leveraged by firms in the aerospace sector. Pointwise complements Cadence’s earlier buyout of NUMECA International.

Cadence also rolled out Sigrity-X solutions in the quarter under review. Sigrity-X is the company’s next-generation signal and power integrity solution that deploys simulation engines and an enormous parallel architecture. Consequently, these solutions offer up to 10 times improved performance for system level simulations for applications across hyperscale, 5G, automotive and aerospace domains.

Synergies from Integrand and AWR acquisition are boosting adoption of Cadence’s System Analysis portfolio offerings. In the first quarter conference call, the company added that Qualcomm expanded usage of Virtuoso and AWR products for advanced RFIC design as well as Clarity solutions for systems analysis in the quarter under review.

Meanwhile, total non-GAAP costs and expenses increased 8.8% year over year to $456 million.

Non-GAAP gross margin expanded 50 basis points (bps) to 90.4%, while non-GAAP operating margin was 38.1%, up 590 bps on a year-over-year basis.

Balance Sheet & Cash Flow

As of Apr 3, 2021, the company had cash and cash equivalents of approximately $743 million compared with $928 million as of Jan 2, 2021.

Moreover, the company’s long-term debt came in at $347 million as of Apr 3, 2021 compared with $346.8 million as of Jan 2, 2021.

The company generated operating cash flow of $208 million in the reported quarter compared with prior-quarter’s figure of $136 million. Free cash flow for the quarter under review was $191 million compared with $105 million reported in fourth-quarter 2020.

The company repurchased shares worth approximately $172 million in the first quarter.  The company had $566 million worth of shares under its buyback authorization as of Apr 3, 2021.

Guidance

Driven by better-than-expected first-quarter results, management raised revenue outlook for 2021. However, it anticipates chip supply constraint along with alarming COVID-19 situation in India to negatively impact revenues in the IP segment in 2021.  Also, Cadence projects increase in expenses in second half 2021 due to headcount additions. The guidance also includes impact of the Pointwise acquisition.

For 2021, revenues are now projected in the range of $2.88-$2.93 billion compared with the previous guidance of $2.86-$2.92 billion.

Non-GAAP earnings are now expected in the range of $2.99-$3.07 per share compared with $2.95-$3.05 per share guided previously.

For 2021, non-GAAP operating margin is now forecast in the range of 35-36% compared with 34.5-36% anticipated previously.

Operating cash flow is anticipated in the range of $900-$950 million for 2021. Management expects to utilize of 50% of free cash flow generated to buy back shares for the year.

For the second quarter of 2021, revenues are projected in the range of $705-$725 million.

Non-GAAP earnings are expected in the range of 74-78 cents per share.

Further, non-GAAP operating margin is forecast to be around 36% for the second quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 14.1% due to these changes.

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 an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly 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.