It has been about a month since the last earnings report for Cadence Design Systems (CDNS). Shares have added about 8.8% 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 Beats on Q3 Earnings & Revenues Estimates
Cadence Design reported third-quarter 2019 non-GAAP earnings of 54 cents per share, which surpassed the Zacks Consensus Estimate of 51 cents and surged 10.2% from the year-ago quarter. Management had envisioned earnings between 50-52 cents per share.
On a GAAP basis, earnings per share during the quarter came in at 36 cents compared with 35 cents reported in the year-ago quarter.
Revenues of $579.6 million outpaced the Zacks Consensus Estimate of $575 million and improved 9% on a year-over-year basis. Moreover, the top line came within management’s expectation of $570 million to $580 million.
The outperformance can be attributed to robust adoption of the company’s digital and signoff, IP solutions, and solid order renewal drove. Moreover, better-expected demand for Tensilica products and robust growth in audio, imaging, computer vision, and machine learning drove revenues.
Quarter in Detail
Product & Maintenance revenues (94.6% of total revenues) of $548.1 million beat the Zacks Consensus Estimate of $543 million and advanced 10.7% year over year.
Meanwhile, Services revenues (5.4%) of $31.5 million marginally missed the Zacks Consensus Estimate of $31.7 million. However, the figure was down 15.9% from the year-ago quarter.
Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 44%, 10%, 21%, 18% and 7%, respectively, to total revenues.
Product-wise, Functional Verification, Digital IC & Signoff, Custom IC Design & Simulation, Systems Interconnect & Analysis, and IP, comprised 20%, 30%, 26%, 9% and 15% of total revenues, respectively.
Considering Verification Suite, the company’s flagship emulation platform Palladium Z1, witnessed eight new customer wins and eight repeat orders.
Management is optimistic about Protium X1, loaded with robust debug capabilities, aimed at enabling 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.
During the quarter under review, revenues from IP witnessed growth of more than 20%. Furthermore, management is elated with growing clout of the company’s innovative cloud-ready solutions.
Non-GAAP operating margin during the reported quarter remained flat year over year and came in at 32%.
Balance Sheet & Cash Flow
The company ended the reported quarter with cash and cash equivalents of approximately $655.2 million compared with the previous-quarter figure of $633.4 million.
Cadence’s long-term debt at the quarter’s end was $345.8 million compared with $345.7 million in the previous quarter.
The company generated operating cash flow of $139 million in the reported quarter compared with prior-quarter figure of $246 million.
The company repurchased shares worth approximately $75 million in the third quarter.
For fourth-quarter 2019, Cadence expects total revenues in the range of $590 million to $600 million.
Management guided non-GAAP earnings in the range of 52-54 cents per share.
Non-GAAP operating margin for fourth-quarter is expected at around 30%.
For fiscal 2019, Cadence raised outlook. Revenues are now projected in the range of $2.327-$2.337 billion compared with the previously guided range of $2.315-$2.335 billion.
Non-GAAP earnings are expected in the range of $2.18-$2.20 per share compared with the previously predicted range of $2.11-$2.17.
Further, non-GAAP operating margin for 2019 is now expected in the range of 31.5-32% compared with the previous guidance of 31-32%. Operating cash flow is now anticipated in the range of $700-$740 million, compared with previously predicted range of $680-$720 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
At this time, Cadence has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, 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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