It has been about a month since the last earnings report for Cadence Design Systems (CDNS). Shares have added about 5.4% 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 its most recent earnings report in order to get a better handle on the important drivers.
Cadence Tops Q2 Earnings Estimates, Raises 2020 View
Cadence Design Systems, Inc. reported second-quarter 2020 non-GAAP earnings of 66 cents per share, which beat the Zacks Consensus Estimate by 26.9%. Also, the bottom line increased 15.8% year over year.
Revenues of $638.4 million increased 10% on a year-over-year basis.
The upside was driven by robust adoption of the company’s digital & signoff and IP solutions as well as expanding customer base. Moreover, better-than-expected demand for Tensilica products and the Cadence Verification Suite that includes Xcelium, Palladium, Jasper, and Protium drove revenues.
Product & Maintenance revenues (94.2% of total revenues) of $601.4 million increased 9.7% year over year.
Services revenues (5.8%) of $37.1 million increased 14.4% from the year-ago quarter’s reported figure.
Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA), and Japan contributed 44%, 12%, 19%, 18% and 7%, respectively, to total revenues.
Product-wise, Functional Verification, Digital IC & Signoff, Custom IC Design & Simulation, Systems Interconnect & Analysis, and IP contributed 24%, 28%, 24%, 10% and 14% to total revenues, respectively.
Cadence Digital Full Flow saw robust traction in the second quarter, with 10 new full flow wins. Cadence also expanded its partnership with Micron (MU) during the quarter to ramp up the development of the latter’s next-gen products. Moreover, the Cadence Verification Suite witnessed solid adoption in the mobile, networking and medical end markets.
Meanwhile, total non-GAAP costs and expenses increased 7.5% year over year to $414.6 million.
Non-GAAP operating margin was 35%, which expanded 100 basis points (bps) on a year-over-year basis.
Balance Sheet & Cash Flow
As of Jun 27, 2020, the company had cash and cash equivalents of approximately $1.19 billion compared with $946.3 million as on Mar 28.
Moreover, the company’s long-term debt came in at $346.4 million as of Jun 27, 2020, compared with $346.2 million as of Mar 28.
The company generated operating cash flow of $345.1 million in the reported quarter compared with prior-quarter’s figure of $217.7 million.
The company repurchased shares worth approximately $75 million in the second quarter.
For third-quarter 2020, Cadence expects total revenues in the range of $630-$650 million.
Management guided non-GAAP earnings in the range of 59-61 cents per share.
Non-GAAP operating margin for third-quarter 2020 is expected at 32%.
Raises 2020 View
Despite taking into account the export limitations for certain Chinese customers as well uncertainties stemming from the COVID-19 pandemic, Cadence raised its guidance for 2020 due to strong continued demand for the company’s innovative solutions.
Notably, revenues are now projected in the range of $2.585-$2.615 billion compared with the previous range of $2.545-$2.585 billion.
Non-GAAP earnings are now expected in the range of $2.50-$2.56 per share compared with the previous range of $2.40-$2.50.
Further, non-GAAP operating margin for 2020 is now expected to be 33%. Earlier, it was expected in the range of 32-33%. Operating cash flow is anticipated in the range of $810-$840 compared with the previous range of $775-$825 million.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted 28.57% due to these changes.
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.
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 #2 (Buy). We expect an above average return from the stock in the next few months.
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