It has been about a month since the last earnings report for Cadence Design Systems (CDNS Quick QuoteCDNS - Free Report) . Shares have added about 11.7% 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 catalysts.

Cadence Beats on Q4 Earnings & Revenues

Cadence posted fourth quarter 2021 non-GAAP earnings of 82 cents per share in fourth-quarter 2021, which topped the Zacks Consensus Estimate by 5.1%. However, the bottom line dropped 1.2% year over year.

Revenues of $773 million surpassed the Zacks Consensus Estimate by 2% and increased 1.7% on a year-over-year basis. The top line benefitted from continued strength across all segments. The company ended 2021 with a backlog of $4.4 billion.

For 2021, Cadence reported revenues of $2.988 billion, up 11.4% from the 2020 tally. Non-GAAP earnings per share (EPS) were $3.29 compared with EPS of $2.80 reported in 2020.

Performance in Details

In the fourth quarter, Product & Maintenance revenues (93.1% of total revenues) of $720 million declined 0.4% year over year. Services revenues (6.9%) of $53 million increased 43.2% from the year-ago quarter’s figure.

Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 43%, 12%, 21%, 18% and 6%, 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 24%, 29%, 21%, 14% and 12% to total revenues, respectively.

Cadence Digital Full Flow saw robust traction with 45 new customer wins in 2021. 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 several deal wins. The company noted that for the hardware family, it won 30 new clients and more than 100 repeat orders in 2021. Most of the deal wins came from clients in the hyperscale, mobile and networking domains. 

Cadence’s Verification business reported 20% year over year. The company added 40 new clients for the Jasper verification platform in 2021.

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 18% year-over-year growth. The company also noted that it now has 250 customers in the Cadence Cloud portfolio.

Total non-GAAP costs and expenses increased 4.2% year over year to $498 million.
    
Non-GAAP gross margin expanded 50 basis points (bps) to 92.7%, but the non-GAAP operating margin was down 160 bps on a year-over-year basis to 35.5%.

Balance Sheet & Cash Flow

As of Jan 1, 2022, the company had cash and cash equivalents of approximately $1.089 billion compared with $1.014 billion as of Oct 2, 2021.

The company’s long-term debt came in at $347.6 million as of Jan 1, 2022, compared with $347.4 million as of Oct 2, 2021.

The company generated an operating cash flow of $216 million in the reported quarter compared with the prior quarter’s figure of $296 million. Free cash flow in the quarter under review was $201 million compared with $277 million reported in the previous quarter.

In 2021, Cadence generated cash flow from operations of $1.101 billion compared with $905 million in the previous year. Free cash flow for full year was $1.036 million compared with $810 million reported in 2020.

The company repurchased shares worth approximately $110 million in the fourth quarter and $612 million worth of shares for 2021.

Guidance

For 2022, revenues are projected in the range of $3.32-$3.38 billion. The Zacks Consensus Estimate for 2022 revenues is currently pegged at $3.18 billion, which indicates year-over-year growth of 6.3%.

Non-GAAP earnings are expected in the range of $3.70-$3.80 per share. The Zacks Consensus Estimate for 2022 earnings is pegged at $3.55 per share, which suggests year-over-year growth of 7.9%.

Non-GAAP operating margin is forecast in the range of 37.5-39%.

For 2022, operating cash flow is now projected in the range of $1.15-$1.25 billion. Management expects to utilize 50% of the free cash flow generated to buy back shares for the year.

For first-quarter 2022, revenues are projected in the range of $850-$870 million. The Zacks Consensus Estimate for revenues is currently pegged at $750.4 million, suggesting a year-over-year increase of 1.9%.

Non-GAAP earnings are expected in the range of $1.00-$1.04 per share. The Zacks Consensus Estimate for earnings is pegged at 77 cents per share, suggesting a year-over-year decline of 7.2%.

Non-GAAP operating margin is forecast between 40-41% for the first quarter. The company expects to repurchase shares worth $250 million in the current quarter.

How Have Estimates Been Moving Since Then?

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

The consensus estimate has shifted 36.07% due to these changes.

VGM Scores

At this time, Cadence has a nice Growth Score of B, though it is lagging a bit 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.