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Why Is Cadence (CDNS) Down 2% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Cadence Design Systems (CDNS). Shares have lost about 2% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Cadence Tops Q1 Earnings & Revenues, Ups '19 View

Cadence Design delivered first-quarter 2019 non-GAAP earnings of 54 cents per share, surpassing the Zacks Consensus Estimate by 4 cents. The figure surged 35% from the year-ago quarter. Management had predicted earnings between 48 cents and 50 cents.

Revenues of $576.7 million outpaced the Zacks Consensus Estimate of $560 million and improved 11.5% on a year-over-year basis. Moreover, the top line fared better than the high end of management’s expectation of $565-$575 million.

Robust adoption of the company’s digital and signoff, IP solutions, and solid order renewal drove earnings outperformance.

Quarter in Detail

Product & Maintenance revenues (94.2% of total revenues) of $543.5 million beat the Zacks Consensus Estimate of $534 million and surged 13.1% year over year.

Meanwhile, Services revenues (5.8%) of $33.2 million lagged the Zacks Consensus Estimate of $34.7 million and were down 9.5% from the year-ago quarter.

Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 44%, 10%, 19%, 18% and 9%, respectively to total revenues.

Product-wise, Functional Verification, Digital IC &Signoff, Custom IC Design& Simulation, Systems Interconnect & Analysis, and IP, comprised 24%, 30%, 25%, 9% and 12% of total revenues, respectively.

Considering Verification Suite, the company’s flagship emulation platform Palladium Z1, witnessed two new customer wins which included SambaNova Systems. The platform garnered 13 repeat orders, including Annapurna Labs, which has been acquired by Amazon (AMZN - Free Report)  .

Momentum witnessed by Protium S1 prototyping platform and Palladium Cloud was noteworthy.

IP segment also witnessed strong quarter driven by high demand for Tensilica, registering eight new customer additions. In the first quarter, the company rolled out silicon-based LPDDR5 solution with an aim to enhance presence in IP domain. Cadence’s latest 112G long-reach SerDes IP is also witnessing adoption.

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

In the reported quarter, Cadence formed an alliance with Green Hills Software, in a bid to explore embedded system security and safety end-market, which is estimated around $3 billion.

Operating Margin Expansion Noteworthy

Non-GAAP gross margin of 89.7% contracted 30 basis points (bps) from the year-ago figure.

In the first quarter, non-GAAP costs and expenses totaled $390.2 million, increasing 4.4% year over year. As a percentage of revenues, the figure contracted approximately 450 bps to 67.7%.

Consequently, non-GAAP operating margin expanded 450 bps to 32.3% in the reported quarter.

Balance Sheet & Cash Flow

The company ended the reported quarter with cash and cash equivalents of approximately $538.9 million compared with the previous-quarter’s figure of $533.3 million. The company noted that at the end of the reported quarter, the United States comprised 16% of cash and cash equivalents.

Cadence’s long-term debt as on Mar 30, 2019, was $345.5 million compared with $345.3 million, as on Dec 29, 2018.

The company generated operating cash flow of $185.4 million in the reported quarter compared with previous quarter’s figure of $131.9 million.

The company repurchased shares worth approximately $81 million in the first quarter.

Guidance for Q2 Holds Promise

For second-quarter 2019, Cadence expects total revenues in the range of $575-$585 million.

Management guided non-GAAP earnings in the range of 52-54 cents per share.

Elevated 2019 View Raises Optimism

For fiscal 2019, Cadence raised outlook. Revenues are now projected in the range of $2.305-$2.335 billion compared with the previously guided range of $2.270-$2.310 billion.

Non-GAAP earnings are now guided in the range of $2.04-$2.12 per share (mid-point of $2.08) compared with the earlier predicted range of $1.97-$2.07.

Further, non-GAAP operating margin for 2019 is expected at around 31%. Operating cash flow is now anticipated in the range of $665-$705 million, compared with previously predicted range of $640-$690 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 9.85% due to these changes.

VGM Scores

Currently, Cadence has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile 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.

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 #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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