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Why Is Cadence (CDNS) Down 7.4% 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 7.4% 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 Beats on Q2 Earnings & Revenues, Ups '19 View

Cadence Design delivered second-quarter 2019 non-GAAP earnings of 57 cents per share, surpassing the Zacks Consensus Estimate of 53 cents and surging 26.7% from the year-ago quarter. Management had predicted earnings between 52-54 cents per share.

Revenues of $580.4 million outpaced the Zacks Consensus Estimate of $579 million and improved 11.9% on a year-over-year basis. Moreover, the top line came within management’s expectation of $575-$585 million.

The outperformance can be attributed to robust adoption of the company’s digital and signoff, IP solutions, and solid order renewal drove.

Quarter in Detail

Product & Maintenance revenues (94.4% of total revenues) of $548 million beat the Zacks Consensus Estimate of $544 million and advanced 12.3% year over year.

Meanwhile, Services revenues (5.6%) of $32.4 million lagged the Zacks Consensus Estimate of $36.1 million. However, the figure was up 6.1% from the year-ago quarter.

Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 42%, 12%, 19%, 20% and 7%, respectively, to total revenues.

Product-wise, Functional Verification, Digital IC & Signoff, Custom IC Design & Simulation, Systems Interconnect & Analysis, and IP, comprised 22%, 31%, 26%, 10% and 11% of total revenues, respectively.

Considering Verification Suite, the company’s flagship emulation platform Palladium Z1, witnessed six new customer wins and nine repeat orders.

During the reported quarter, the company introduced Verification IP (VIP), which is compliant with DisplayPort 2.0 standard. It offers developers end-to-end capabilities to accelerate the functional verification processes of system-on-chip (SoC) designs for complex applications. The new offering enables seamless integration with testbenches at SoC, IP and other system levels, which accelerates verification closure.

Cadence recently unveiled Protium X1 with robust debug capabilities, which will enable software developers to design advanced 5G and AI chips. The expansion of Cadence Verification Suite with the latest prototyping platform is expected to provide the company a competitive edge against Synopsys in the Electronic Design Automation (EDA) market.

In fact, chip-making giant NVIDIA is implementing Protium X1, which is a noteworthy win.

The company also unveiled new products, which includes Spectre X, Smart JasperGold, Tensilica Vision Q7, during the quarter.

Digital IC & Signoff witnessed double-digit growth year-over-year, primarly due to new customer addition. During the quarter, Cadence digital implementation Solution was selected by Samsung Austin R&D Center for a next-generation high-end mobile CPU core design.

Further, Cadence recently announced that its Tensilica Vision P6 DSPs have been selected by Toshiba to accelerate development of advanced automotive SoCs.

Moreover, Cadence’s flagship enterprise emulation verification platform — Palladium Z1 — has also been deployed by Acacia Communications, Inc. to design advanced DSP (or digital signal processor) ASICs.

Furthermore, management is elated with growing clout of the company’s innovative cloud-ready solutions.

Operating Margin

Non-GAAP gross margin of 91.6% expanded 80 basis points from the year-ago figure.

In the second quarter, non-GAAP costs and expenses totaled $385.6 million, increasing 5.9% year over year.

Non-GAAP operating margin expanded 380 bps to 33.6% in the reported quarter.

Balance Sheet & Cash Flow

The company ended the reported quarter with cash and cash equivalents of approximately $633.4 million compared with the previous-quarter’s figure of $538.9 million.

Cadence’s long-term debt at the quarter’s end was $345.7 million compared with $345.5 million in the previous quarter.

The company generated operating cash flow of $246 million in the reported quarter compared with previous quarter’s figure of $185.4 million.

The company repurchased shares worth approximately $75 million in the second quarter.

Guidance

For third-quarter 2019, Cadence expects total revenues in the range of $570 million to $580 million

Management guided non-GAAP earnings in the range of 50-52 cents per share.

Non-GAAP operating margin for third-quarter is expected at around 30%.

For fiscal 2019, Cadence raised outlook. Revenues are now projected in the range of $2.315-$2.335 billion compared with the previously guided range of $2.305-$2.335 billion.

Non-GAAP earnings are expected in the range of $2.11-$2.17 per share compared with the earlier predicted range of $2.04-$2.12.

Further, non-GAAP operating margin for 2019 is now expected in the range of 31-32% compared with the previous guidance of 31%. Operating cash flow is now anticipated in the range of $680-$720 million, compared with previously predicted range of $665-$705 million.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Cadence has a great Growth Score of A, though it is lagging a lot 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 B. 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. 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.


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