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Why Is Cadence (CDNS) Down 5.4% Since Last Earnings Report?
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A month has gone by since the last earnings report for Cadence Design Systems (CDNS - Free Report) . Shares have lost about 5.4% 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 its most recent earnings report in order to get a better handle on the important drivers.
Cadence Q2 Earnings & Revenues Top Estimates
Cadence non-GAAP earnings of $1.22 per share in second-quarter 2023, which topped the Zacks Consensus Estimate by 3.4% and increased 13% year over year.
Revenues of $977 million surpassed the Zacks Consensus Estimate by 0.3% and rose 13.9% on a year-over-year basis. The top line benefited from continued strength across all segments driven by higher customer demand. CDNS ended the quarter with a backlog of $5.3 billion.
Management also raised full-year guidance on the back of strong second-quarter results. The company also highlighted increasing business opportunities presented by proliferation of Generative AI.
Cadence noted that customers are significantly increasing their R&D budget in AI-driven automation which bodes well for the company. Most of the generational trends like 5G, hyperscale computing and autonomous driving are being reinforced by the use of Generative AI. This is accelerating chip design activity and thereby creating plenty of business prospects for the company, added Cadence. CDNS also stated that it has collaborated with Tesla for development of the latter’s Dojo AI supercomputer.
Revenues for 2023 are now projected in the range of $4.05-$4.09 billion. Earlier, management had projected revenues in the $4.03-$4.07 billion band.
Non-GAAP earnings for 2023 are now expected to be between $5.05 per share and $5.11 per share. Earlier, non-GAAP earnings were anticipated in the range of $4.96-$5.04 per share.
For third-quarter 2023, revenues are estimated in the $990-$1,010 million band. Non-GAAP earnings for third-quarter 2023 are anticipated to be between $1.18 per share and $1.22 per share.
Performance in Details
In the second quarter, Product & Maintenance revenues (94.5% of total revenues) of $923 million were up 14.9% year over year. Services revenues (5.5%) of $54 million declined 1.8% from the year-ago quarter’s figure. Our estimates for revenues from Product & Maintenance, and Service segments were $911.6 million and $59.2 million, respectively.
Geographically, the Americas, China, Other Asia, Europe, and the Middle East and Africa and Japan contributed 41%, 18%, 18%, 17% and 6%, respectively, to total revenues in the quarter under review.
Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, Intellectual Property, and Systems Design & Analysis contributed 22%, 27%, 27%, 11% and 13% to total revenues, respectively.
Cadence Cerebrus AI-driven solution witnessed accelerating momentum and was deployed by several customers.
The verification business increased 27% year over year due to rising complexity of system verification and software bring-up.
Palladium and Protium (especially Z2 and X2) platforms witnessed continued traction with many deal wins. CDNS won 14 new clients and 45 repeat orders in the second quarter. Most deal wins came from clients in the AI, hyperscale computing and automotive segments.
Cadence’s System Design & Analysis Business segment reported 23% year-over-year rise as it expanded its presence beyond electronic design automation. The company’s digital IC business reported 15% year-over-year revenue growth, driven by rapid adoption of digital full flow solutions.
For the second quarter, total non-GAAP costs and expenses increased 15.2% year over year to $569 million.
Non-GAAP gross margin expanded 80 basis points (bps) to 91.4%, but non-GAAP operating margin contracted 60 bps on a year-over-year basis to 41.8%.
Balance Sheet & Cash Flow
As of Jun 30, 2023, CDNS had cash and cash equivalents of $874 million compared with $917 million as of Mar 31, 2023
Long-term debt was $648.6 million as of Jun 30, 2023 compared with $648.3 million as of Mar 31, 2023.
Cadence generated operating cash flow of $414 million in the reported quarter compared with the prior quarter’s figure of $267 million. Free cash flow was $394 million compared with $241 million reported in the previous quarter.
It repurchased shares worth $265 million in the second quarter.
Q3 and 2023 Guidance
For 2023, non-GAAP operating margin is forecast in the range of 41.2-42.2%.
For 2023, operating cash flow is projected to be between $1.3 billion and $1.4 billion. Management expects to utilize 50% of the free cash flow to repurchase shares in 2023.
Non-GAAP operating margin is estimated to be nearly 40% for the third quarter. The company expects to repurchase shares worth approximately $125 million in the third quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
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 a D. Following the exact same course, 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cadence has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Cadence is part of the Zacks Computer - Software industry. Over the past month, SAP (SAP - Free Report) , a stock from the same industry, has gained 4.4%. The company reported its results for the quarter ended June 2023 more than a month ago.
SAP reported revenues of $8.18 billion in the last reported quarter, representing a year-over-year change of +2.2%. EPS of $1.14 for the same period compares with $1.02 a year ago.
SAP is expected to post earnings of $1.43 per share for the current quarter, representing a year-over-year change of +26.6%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.
SAP has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of F.
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Why Is Cadence (CDNS) Down 5.4% Since Last Earnings Report?
A month has gone by since the last earnings report for Cadence Design Systems (CDNS - Free Report) . Shares have lost about 5.4% 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 its most recent earnings report in order to get a better handle on the important drivers.
Cadence Q2 Earnings & Revenues Top Estimates
Cadence non-GAAP earnings of $1.22 per share in second-quarter 2023, which topped the Zacks Consensus Estimate by 3.4% and increased 13% year over year.
Revenues of $977 million surpassed the Zacks Consensus Estimate by 0.3% and rose 13.9% on a year-over-year basis. The top line benefited from continued strength across all segments driven by higher customer demand. CDNS ended the quarter with a backlog of $5.3 billion.
Management also raised full-year guidance on the back of strong second-quarter results. The company also highlighted increasing business opportunities presented by proliferation of Generative AI.
Cadence noted that customers are significantly increasing their R&D budget in AI-driven automation which bodes well for the company. Most of the generational trends like 5G, hyperscale computing and autonomous driving are being reinforced by the use of Generative AI. This is accelerating chip design activity and thereby creating plenty of business prospects for the company, added Cadence. CDNS also stated that it has collaborated with Tesla for development of the latter’s Dojo AI supercomputer.
Revenues for 2023 are now projected in the range of $4.05-$4.09 billion. Earlier, management had projected revenues in the $4.03-$4.07 billion band.
Non-GAAP earnings for 2023 are now expected to be between $5.05 per share and $5.11 per share. Earlier, non-GAAP earnings were anticipated in the range of $4.96-$5.04 per share.
For third-quarter 2023, revenues are estimated in the $990-$1,010 million band. Non-GAAP earnings for third-quarter 2023 are anticipated to be between $1.18 per share and $1.22 per share.
Performance in Details
In the second quarter, Product & Maintenance revenues (94.5% of total revenues) of $923 million were up 14.9% year over year. Services revenues (5.5%) of $54 million declined 1.8% from the year-ago quarter’s figure. Our estimates for revenues from Product & Maintenance, and Service segments were $911.6 million and $59.2 million, respectively.
Geographically, the Americas, China, Other Asia, Europe, and the Middle East and Africa and Japan contributed 41%, 18%, 18%, 17% and 6%, respectively, to total revenues in the quarter under review.
Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, Intellectual Property, and Systems Design & Analysis contributed 22%, 27%, 27%, 11% and 13% to total revenues, respectively.
Cadence Cerebrus AI-driven solution witnessed accelerating momentum and was deployed by several customers.
The verification business increased 27% year over year due to rising complexity of system verification and software bring-up.
Palladium and Protium (especially Z2 and X2) platforms witnessed continued traction with many deal wins. CDNS won 14 new clients and 45 repeat orders in the second quarter. Most deal wins came from clients in the AI, hyperscale computing and automotive segments.
Cadence’s System Design & Analysis Business segment reported 23% year-over-year rise as it expanded its presence beyond electronic design automation. The company’s digital IC business reported 15% year-over-year revenue growth, driven by rapid adoption of digital full flow solutions.
For the second quarter, total non-GAAP costs and expenses increased 15.2% year over year to $569 million.
Non-GAAP gross margin expanded 80 basis points (bps) to 91.4%, but non-GAAP operating margin contracted 60 bps on a year-over-year basis to 41.8%.
Balance Sheet & Cash Flow
As of Jun 30, 2023, CDNS had cash and cash equivalents of $874 million compared with $917 million as of Mar 31, 2023
Long-term debt was $648.6 million as of Jun 30, 2023 compared with $648.3 million as of Mar 31, 2023.
Cadence generated operating cash flow of $414 million in the reported quarter compared with the prior quarter’s figure of $267 million. Free cash flow was $394 million compared with $241 million reported in the previous quarter.
It repurchased shares worth $265 million in the second quarter.
Q3 and 2023 Guidance
For 2023, non-GAAP operating margin is forecast in the range of 41.2-42.2%.
For 2023, operating cash flow is projected to be between $1.3 billion and $1.4 billion. Management expects to utilize 50% of the free cash flow to repurchase shares in 2023.
Non-GAAP operating margin is estimated to be nearly 40% for the third quarter. The company expects to repurchase shares worth approximately $125 million in the third quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
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 a D. Following the exact same course, 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cadence has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Cadence is part of the Zacks Computer - Software industry. Over the past month, SAP (SAP - Free Report) , a stock from the same industry, has gained 4.4%. The company reported its results for the quarter ended June 2023 more than a month ago.
SAP reported revenues of $8.18 billion in the last reported quarter, representing a year-over-year change of +2.2%. EPS of $1.14 for the same period compares with $1.02 a year ago.
SAP is expected to post earnings of $1.43 per share for the current quarter, representing a year-over-year change of +26.6%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.
SAP has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of F.