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Why Is Cadence (CDNS) Up 7.3% Since Last Earnings Report?

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It has been about a month since the last earnings report for Cadence Design Systems (CDNS - Free Report) . Shares have added about 7.3% 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 Q2 Earnings & Revenues Top Estimates, Up Y/Y

Cadence Design Systems Inc posted non-GAAP earnings of $1.08 per share in second-quarter 2022, which topped the Zacks Consensus Estimate by 11.3% and increased 26% year over year.

Revenues of $857.5 million surpassed the Zacks Consensus Estimate by 2.45% and increased 18% 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 $5.6 billion.

Driven by strong second-quarter results, the company raised its outlook for 2022. Revenues for the full year are now projected in the range of $3.47-$3.51 billion compared with the earlier guidance of $3.395-$3.435 billion. The Zacks Consensus Estimate for 2022 revenues is currently pegged at $3.4 billion, which indicates year-over-year growth of 13.8%.

Non-GAAP earnings for 2022 are expected in the range of $4.06-$4.12 per share compared with the earlier guidance of $3.89-$3.97 per share. The Zacks Consensus Estimate for 2022 earnings is pegged at $3.94 per share, which suggests year-over-year growth of 19.8%.

In the reported quarter, Cadence announced an agreement to acquire OpenEye Scientific Software for about $500 million in cash. The deal is expected to close in the third quarter of 2022 and improve revenue by approximately $40 million in fiscal 2023, per company estimates.

The acquisition is aimed at accelerating Cadence’s Intelligent System Design strategy and expand its total addressable market. The company wants to expand its reach in the molecular modeling and simulation market as pharmaceutical and biotechnology companies leverage computational software solutions for drug discovery.

Performance in Details

In the second quarter, Product & Maintenance revenues (93.6% of total revenues) of $802.3 million were up 16.6% year over year. Services revenues (6.4%) of $55.2 million increased 36.7% from the year-ago quarter’s figure.

Geographically, the Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 45%, 13%, 18%, 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 23%, 27%, 24%, 14% and 12% to total revenues, respectively.

The company’ s digital and signoff business delivered 14% year-over-year growth in revenues. Digital Full Flow saw robust traction with 25 new customer wins in the first half of the year. The company’s Cadence Cerebrus solution witnessed accelerating momentum and was deployed by several customers like Intel, NVIDIA, Broadcom, Samsung and Renesas.

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 second quarter, which included more than two-third for both platforms. Mostly deal wins came from clients in the hyperscale, AI/ML and server customers.

In the quarter under review, the company launched 15 Verification IP solutions that enable customers across industrial, automotive, hyperscale data center and mobile domains to develop system-on-chip.

Cadence’s System Design & Analysis Business segment reported 29% year-over-year growth.

In the quarter under review, total non-GAAP costs and expenses increased 12% year over year to $493.9 million.

Non-GAAP gross margin contracted 120 basis points (bps) to 90.6%, but the non-GAAP operating margin was up 300 bps on a year-over-year basis to 42.4% in the quarter under review.

Balance Sheet & Cash Flow

As of Jul 2, 2022, the company had cash and cash equivalents of approximately $1.03 billion compared with $1.135 billion as of Apr 2, 2022.

The company’s long-term debt came in at $348 million as of Jul 2, 2022, compared with $347.8 million as of Apr 2, 2022.

The company generated an operating cash flow of $661.1 million in the reported quarter compared with the prior quarter’s figure of $588.8 million. Free cash flow in the quarter under review was $301 million compared with $319 million reported in the previous quarter.

The company repurchased shares worth approximately $320 million in the second quarter.




2022 Outlook Raised

For 2022, the non-GAAP operating margin is forecast in the range of 39.25-40.25% against the range of 38.5-40% guided previously.

For 2022, operating cash flow is projected to be $1.2 billion. Management expects to utilize the free cash flow generated to repurchase shares worth approximately $900 million.

For third-quarter 2022, revenues are projected in the range of $860-$880 million. The Zacks Consensus Estimate for revenues is currently pegged at $831 million, suggesting a year-over-year increase of 10.7%.

Non-GAAP earnings are expected to be 94-98 cents per share. The Zacks Consensus Estimate for earnings is pegged at 88 cents per share, suggesting a year-over-year increase of 10%.

Non-GAAP operating margin is forecast between 37-38% for the third quarter. The company expects to repurchase shares for at least $150 million in the next quarter.

How Have Estimates Been Moving Since Then?

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

The consensus estimate has shifted 16.41% due to these changes.

VGM Scores

Currently, 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 lowest 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.


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 #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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