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Cadence's (CDNS) Performance Driven by Strong Demand Trends
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Cadence Design Systems, Inc (CDNS - Free Report) top-line performance is gaining from solid demand for its diversified product portfolio.
Cadence offers products and tools that help customers design electronic products. The company’s core electronic design automation software and services enable engineers to develop different types of ICs.
Solid financial performance has also led to a good run on the trading front. The company’s shares have gained 55.3% in the past year compared with the sub-industry’s and S&P 500 Composite’s growth of 51.4% and 32.6%, respectively.
With healthy fundamentals and strong growth opportunities, this Zacks Rank #1 (Strong Buy) stock appears to be a solid investment option at the moment.
Image Source: Zacks Investment Research
Cadence’s EPS for 2024 and 2025 is expected to climb 15.2% and 18.2% from the year-ago levels to $5.93 and $7.02, respectively. The Zacks Consensus Estimate for 2024 and 2025 EPS has improved 3% and 7.7%, respectively, in the past 60 days.
The long-term earnings growth rate is 17.1%. CDNS beat estimates in each of the last four quarters, delivering an average earnings surprise of 3.4%.
Revenues for 2024 and 2025 are projected to rise 12.2% and 12.7% year over year to $4.59 billion and $5.17 billion, respectively.
Growth Catalysts
Accelerated design activity owing to transformative generational trends, such as generative AI, hyperscale computing, 5G and autonomous driving, is likely to boost the top line going ahead. Momentum in 3D-IC and chiplet designs bodes well.
The Digital IC business was up 22% year over year in the last reported quarter. CDNS’ digital full flow was adopted by 34 additional customers during 2023.
The Functional Verification business is gaining traction due to the rising complexity of system verification and software bring-up. Revenues from this segment were up 11% year over year in the fourth quarter of 2023.
Demand for CDNS’ hardware systems remains robust. Palladium and Protium (especially Z2 and X2) platforms witnessed continued traction with many deal wins. It added 26 new and more than 110 repeat customers during 2023.
The company also announced a new set of applications designed to enhance the capabilities of its flagship Palladium Z2 Enterprise Emulation System. The applications are domain-specific apps that are tailored to help customers navigate the increasing complexity of system design.
Expansion of its well-established partnerships with strategic partners like NVIDIA, Arm and Intel is a tailwind.
Recently, Cadence took a leap forward in its multi-year agreement with NVIDIA to drive innovation across AI, system design and analysis, digital biology and Electronic Design Automation.
The partners introduced two solutions which include an AI-driven digital twin platform. Apart from the twin platform, CDNS’ Orion platform will now have access to NVIDIA’s BioNeMo platform to fast-track drug discoveries.
Synergies From Acquisitions
Strategic acquisitions have also played a pivotal role in propelling top-line performance. In March 2024, Cadence inked an agreement to acquire a leading provider of engineering simulation solutions — BETA CAE Systems International AG. The acquisition will likely enhance Cadence's Intelligent System Design strategy by broadening its range of multiphysics system analysis offerings and helping it enter into the structural analysis sector.
Multiphysics simulations are becoming important early in the design cycle due to growing system complexity and time-to-market challenges, which are driven by accelerated mechanical and electrical hyperconvergence, and the digital revolution of numerous industries.
The deal involves Cadence paying approximately $1.24 billion, with 60% of the consideration in cash and 40% to be paid through the issue of its stock to BETA CAE shareholders. The deal is expected to close in the second quarter of 2024, subject to regulatory approvals.
In January 2024, the company purchased California-based embedded software and system-level solutions provider Invecas, Inc. The Invecas buyout adds a skilled engineering team (based in Hyderabad, India), which will aid CDNS in offering its customers with custom solutions across chip design, advanced packaging, product engineering and embedded software.
Apart from Invecas, it also acquired Intrinsix to expand footprint in the advanced nodes, radio frequency, mixed signal and security algorithms’ space. The buyouts of Pointwise and NUMECA were also aimed at increasing the system analysis portfolio with more CFD solutions. The OpenEye Scientific Software acquisition will aid in augmenting its reach in the pharmaceutical and biotechnology market.
Strong Liquidity Position
At the end of 2023, Cadence had cash and cash equivalents of $1.008 billion. Long-term debt was $299.8 million as of Dec 31, 2023. It generated operating cash flow of $1.349 billion compared with the prior year’s $1.242 billion. Free cash flow was $1.247 billion compared with $1.119 billion a year ago.
Strong cash flows help Cadence to continue shareholder-friendly initiatives. Lower number of outstanding shares helps the bottom line. It repurchased shares worth $125 million in the fourth quarter and $700 million in 2023. CDNS expects to utilize 50% of the free cash flow to repurchase shares in 2024.
Headwinds Persist
Higher costs, stiff competition and weak global macroeconomic conditions continue to remain concerns for CDNS.
Also, management's guidance for the first quarter of 2024 was lower than the reported actuals in the prior-year quarter.
For first-quarter 2024, revenues are estimated between $990 million and $1.01 billion. The company reported sales of $1.022 billion in the year-ago quarter.
Acquisitions have affected its balance sheet, as a high level of goodwill and intangible assets add to the risk of investing in the company. The company’s goodwill and intangible assets totaled $1.873 billion or 33% of total assets as of Dec 31, 2023.
Moreover, management added that the acquisition of BETA CAE is expected to lower 2024 EPS by approximately 12 cents. The company anticipates the deal to become accretive in 2025, based on Cadence's debt repayment and share repurchase strategies.
The Zacks Consensus Estimate for MANH’s 2024 EPS has increased 3.6% in the past 60 days to $3.76. Manhattan Associates’ earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 27.6%. Shares of MANH have surged 74% in the past year.
The Zacks Consensus Estimate for SNPS’ fiscal 2024 EPS increased 1% in the past 60 days to $13.56. The long-term earnings growth rate is 17.5%. SNPS’ earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 4.1%. Shares of SNPS have soared 58.8% in the past year.
The Zacks Consensus Estimate for Microsoft’s fiscal 2024 EPS is pegged at $11.63, indicating growth of 18.6% from the year-ago levels. Microsoft’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 8.8%. The long-term earnings growth rate is 16.2%. Shares of MSFT have rallied 56.2% in the past year.
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Cadence's (CDNS) Performance Driven by Strong Demand Trends
Cadence Design Systems, Inc (CDNS - Free Report) top-line performance is gaining from solid demand for its diversified product portfolio.
Cadence offers products and tools that help customers design electronic products. The company’s core electronic design automation software and services enable engineers to develop different types of ICs.
Solid financial performance has also led to a good run on the trading front. The company’s shares have gained 55.3% in the past year compared with the sub-industry’s and S&P 500 Composite’s growth of 51.4% and 32.6%, respectively.
With healthy fundamentals and strong growth opportunities, this Zacks Rank #1 (Strong Buy) stock appears to be a solid investment option at the moment.
Image Source: Zacks Investment Research
Cadence’s EPS for 2024 and 2025 is expected to climb 15.2% and 18.2% from the year-ago levels to $5.93 and $7.02, respectively. The Zacks Consensus Estimate for 2024 and 2025 EPS has improved 3% and 7.7%, respectively, in the past 60 days.
The long-term earnings growth rate is 17.1%. CDNS beat estimates in each of the last four quarters, delivering an average earnings surprise of 3.4%.
Revenues for 2024 and 2025 are projected to rise 12.2% and 12.7% year over year to $4.59 billion and $5.17 billion, respectively.
Growth Catalysts
Accelerated design activity owing to transformative generational trends, such as generative AI, hyperscale computing, 5G and autonomous driving, is likely to boost the top line going ahead. Momentum in 3D-IC and chiplet designs bodes well.
The Digital IC business was up 22% year over year in the last reported quarter. CDNS’ digital full flow was adopted by 34 additional customers during 2023.
The Functional Verification business is gaining traction due to the rising complexity of system verification and software bring-up. Revenues from this segment were up 11% year over year in the fourth quarter of 2023.
Demand for CDNS’ hardware systems remains robust. Palladium and Protium (especially Z2 and X2) platforms witnessed continued traction with many deal wins. It added 26 new and more than 110 repeat customers during 2023.
The company also announced a new set of applications designed to enhance the capabilities of its flagship Palladium Z2 Enterprise Emulation System. The applications are domain-specific apps that are tailored to help customers navigate the increasing complexity of system design.
Expansion of its well-established partnerships with strategic partners like NVIDIA, Arm and Intel is a tailwind.
Recently, Cadence took a leap forward in its multi-year agreement with NVIDIA to drive innovation across AI, system design and analysis, digital biology and Electronic Design Automation.
The partners introduced two solutions which include an AI-driven digital twin platform. Apart from the twin platform, CDNS’ Orion platform will now have access to NVIDIA’s BioNeMo platform to fast-track drug discoveries.
Synergies From Acquisitions
Strategic acquisitions have also played a pivotal role in propelling top-line performance. In March 2024, Cadence inked an agreement to acquire a leading provider of engineering simulation solutions — BETA CAE Systems International AG. The acquisition will likely enhance Cadence's Intelligent System Design strategy by broadening its range of multiphysics system analysis offerings and helping it enter into the structural analysis sector.
Multiphysics simulations are becoming important early in the design cycle due to growing system complexity and time-to-market challenges, which are driven by accelerated mechanical and electrical hyperconvergence, and the digital revolution of numerous industries.
The deal involves Cadence paying approximately $1.24 billion, with 60% of the consideration in cash and 40% to be paid through the issue of its stock to BETA CAE shareholders. The deal is expected to close in the second quarter of 2024, subject to regulatory approvals.
In January 2024, the company purchased California-based embedded software and system-level solutions provider Invecas, Inc. The Invecas buyout adds a skilled engineering team (based in Hyderabad, India), which will aid CDNS in offering its customers with custom solutions across chip design, advanced packaging, product engineering and embedded software.
Apart from Invecas, it also acquired Intrinsix to expand footprint in the advanced nodes, radio frequency, mixed signal and security algorithms’ space. The buyouts of Pointwise and NUMECA were also aimed at increasing the system analysis portfolio with more CFD solutions. The OpenEye Scientific Software acquisition will aid in augmenting its reach in the pharmaceutical and biotechnology market.
Strong Liquidity Position
At the end of 2023, Cadence had cash and cash equivalents of $1.008 billion. Long-term debt was $299.8 million as of Dec 31, 2023. It generated operating cash flow of $1.349 billion compared with the prior year’s $1.242 billion. Free cash flow was $1.247 billion compared with $1.119 billion a year ago.
Strong cash flows help Cadence to continue shareholder-friendly initiatives. Lower number of outstanding shares helps the bottom line. It repurchased shares worth $125 million in the fourth quarter and $700 million in 2023. CDNS expects to utilize 50% of the free cash flow to repurchase shares in 2024.
Headwinds Persist
Higher costs, stiff competition and weak global macroeconomic conditions continue to remain concerns for CDNS.
Also, management's guidance for the first quarter of 2024 was lower than the reported actuals in the prior-year quarter.
For first-quarter 2024, revenues are estimated between $990 million and $1.01 billion. The company reported sales of $1.022 billion in the year-ago quarter.
Acquisitions have affected its balance sheet, as a high level of goodwill and intangible assets add to the risk of investing in the company. The company’s goodwill and intangible assets totaled $1.873 billion or 33% of total assets as of Dec 31, 2023.
Moreover, management added that the acquisition of BETA CAE is expected to lower 2024 EPS by approximately 12 cents. The company anticipates the deal to become accretive in 2025, based on Cadence's debt repayment and share repurchase strategies.
Other Stocks to Consider
Some other top-ranked stocks worth consideration in the broader technology space are Manhattan Associates (MANH - Free Report) , Synopsys (SNPS - Free Report) and Microsoft (MSFT - Free Report) . While Manhattan Associates and Synopsys sport a Zacks Rank #1 each, Microsoft carries a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for MANH’s 2024 EPS has increased 3.6% in the past 60 days to $3.76. Manhattan Associates’ earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 27.6%. Shares of MANH have surged 74% in the past year.
The Zacks Consensus Estimate for SNPS’ fiscal 2024 EPS increased 1% in the past 60 days to $13.56. The long-term earnings growth rate is 17.5%. SNPS’ earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 4.1%. Shares of SNPS have soared 58.8% in the past year.
The Zacks Consensus Estimate for Microsoft’s fiscal 2024 EPS is pegged at $11.63, indicating growth of 18.6% from the year-ago levels. Microsoft’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 8.8%. The long-term earnings growth rate is 16.2%. Shares of MSFT have rallied 56.2% in the past year.