Cadence (CDNS) Beats Q3 Earnings Estimates, Raises Guidance

Zacks Equity Research
·6 min read

Cadence Design Systems Inc CDNS posted third-quarter 2020 non-GAAP earnings of 70 cents per share, which topped the Zacks Consensus Estimate by 14.8%. Also, the bottom line increased 29.6% year over year.

Revenues of $666.6 million surpassed the Zacks Consensus Estimate by 4.1% and increased 15% on a year-over-year basis.

The top line growth was driven by continued strength in the company’s digital & signoff solutions as well as Cadence Verification Suite that includes Xcelium, Palladium, Jasper, and Protium offerings along with expanding customer base. In the third quarter, management added 15 new end-market customers across 5G, automotive, aerospace and defense verticals.

Increasing uptake of the company's products instill confidence in the stock. Notably, shares of Cadence have surged 63.7% in the year-to-date period compared with the industry’s rally of 33.7%.

Cadence Design Systems, Inc. Price, Consensus and EPS Surprise

Cadence Design Systems, Inc. Price, Consensus and EPS Surprise
Cadence Design Systems, Inc. Price, Consensus and EPS Surprise

Cadence Design Systems, Inc. price-consensus-eps-surprise-chart | Cadence Design Systems, Inc. Quote

Quarter Details

Product & Maintenance revenues (94.6% of total revenues) of $630.3 million increased 15% year over year.

Services revenues (5.4%) of $36.3 million increased 15.2% from the year-ago quarter’s figure.

Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA), and Japan contributed 42%, 17%, 19%, 16% and 6%, respectively, to total revenues.

Product-wise, Functional Verification, Digital IC & Signoff, Custom IC Design & Simulation, Systems Design & Analysis, and IP contributed 23%, 27%, 24%, 11% and 15% to total revenues, respectively.

Cadence Digital Full Flow saw robust traction in the third quarter, with 9 new full flow wins. Moreover, the Cadence Verification Suite witnessed solid adoption in the mobile, networking and medical end markets.

The company also introduced unveiled Xcelium ML in the third quarter. The company infused its Xcelium Logic simulator with machine learning technology (ML) to provide five-times faster verification for randomized regressions. 

Under the System Analysis portfolio, Clarity and Celsius offerings witnessed robust uptake in verticals like hyperscale, mobile and Artificial Intelligence (AI). Rockley Photonics and Teradyne implemented Clarity EM solution.

In October 2020, Cadence introduced Clarity 3D Transient Solver offering under its System Analysis Portfolio. Clarity 3D Transient Solver is a simulation solution that enables 10 times faster speed to work on electromagnetic interference (EMI) system design problems as compared with legacy 3D field solvers.

Synergies from Integrand and AWR acquisition are boosting adoption of Cadence’s System Analysis portfolio offerings.

Further, Cadence’s Advanced Packaging solutions continue to witness incremental adoption in hyperscale and automotive verticals. The company’s Allegro technology was implemented by a well-known auto maker for wafer level system packaging requirements in the third quarter.

Meanwhile, total non-GAAP costs and expenses increased 8% year over year to $427.6 million.

Non-GAAP operating margin was 35.9%, which expanded 420 basis points (bps) on a year-over-year basis.

Balance Sheet & Cash Flow

As of Sep 26, 2020, the company had cash and cash equivalents of approximately $1.31 billion compared with $1.19 million as on Jun 27.

Moreover, the company’s long-term debt came in at $346.6 million as of, Sep 26, 2020, compared with $346.4 million as of Jun 27. The company ended the third quarter with revolving credit facility of $350 million, flat sequentially.

The company generated operating cash flow of $206.6 million in the reported quarter compared with prior-quarter’s figure of $345.1 million.

The company repurchased shares worth approximately $75 million in the third quarter. Cadence also announced increases in share buyback authorization by $750 million. This takes the total repurchase authorization to $869 million at the end of third-quarter 2020.

Q4 Guidance

For fourth-quarter 2020, Cadence expects total revenues in the range of $720-$740 million (midpoint of $730 million). Management projects incremental revenues of $45 million due to an additional week in the fourth quarter.

The Zacks Consensus Estimate for revenues is pegged at $707.6 million, which indicates growth of 18% from the year-ago quarter’s figure.

Management guided non-GAAP earnings in the range of 72-76 cents per share. The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 69 cents, which suggests growth of 27.8% from prior-year quarter’s reported figure.

Non-GAAP operating margin for fourth-quarter 2020 is expected at 34-35%.

Guidance for 2020 Revised Upwards

Even after factoring in export limitations for certain Chinese customers as well uncertainties stemming from the COVID-19 pandemic, Cadence revised its guidance upwards for 2020 owing to continued demand for the company’s innovative solutions as well as an extra week in fiscal 2020.

Management expects $40 million as incremental revenues in the second half of 2020 driven by increased demand for hardware and IP portfolio. Also, Cadence revised its backlog bookings to $58 million at the end of third quarter compared with $70 million recorded at the end of second quarter of 2020.

Notably, revenues are now projected in the range of $2.643-$2.663 billion compared with the previous range of $2.585-$2.615 billion. The Zacks Consensus Estimate for 2020 revenues is currently pegged at $2.6 billion, which indicates growth of 11.5% from the year-ago quarter’s figure.

Non-GAAP earnings are now expected in the range of $2.68-$2.72 per share compared with the previous range of $2.50-$2.56. The Zacks Consensus Estimate for 2020 earnings is pegged at $2.55 per share, which suggests growth of 15.9% from the prior-year quarter’s reported level.

Further, non-GAAP operating margin for 2020 is now expected to be 34-35%. Earlier, it was expected to be 33%.

Operating cash flow is anticipated in the range of $840-$870 compared with the previous range of $810-$840 million. Management expects to utilize of free cash flow generated to buy back shares for the year.

Zacks Rank & Stocks to Consider

Cadence currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Avnet AVT, CDW Corp. CDW and Himax HIMX, which sport a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Avnet, CDW, Himax are scheduled to report quarterly results on Oct 28, Nov 2, and Nov 12, respectively.

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