Why has tenure (CDNS) increased by 3% since the last earnings report?

It’s been a month since Cadence Design Systems (CDNS) last reported earnings. Shares rose about 3% in that time, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Cadence headed for a decline? 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 better understand the important catalysts.

Cadence’s best first-quarter earnings estimates

Cadence Design Systems reported first-quarter 2024 non-GAAP earnings per share (EPS) of $1.17, which beat the Zacks Consensus Estimate by 3.5%. However, on an annual basis it decreased by 9.3%.

Revenues of $1.009 billion missed the Zacks Consensus Estimate by 0.5% and declined 1.2% year-over-year. The financial result was impacted by weakening product and maintenance revenues. CDNS ended the quarter with backlogs of $6 billion and current outstanding performance obligations of $3.1 billion.

Management provided full-year guidance for 2024. The company emphasized that the design business continues to grow strongly, driven by transformative generational trends such as hyperscale computing, 5G and autonomous driving, boosted by the spread of artificial intelligence. CDNS has also expanded its established collaborations with strategic partners such as NVIDIA, GlobalFoundries and IBM.

Revenue in 2024 is now forecast to be between $4.56 billion and $4.62 billion, compared to previous guidance of $4.55 billion to $4.61 billion.

Non-GAAP EPS for 2024 is expected to be $5.88 to $5.98, compared to previous guidance of $5.87 to $5.97.

Non-GAAP operating margin for 2024 is projected to be in the range of 42-43%. Management anticipates operating cash flow of $1.35 billion to $1.45 billion. The company expects to use 50% of free cash flow for share repurchases in 2024.

Second-quarter 2024 revenues are expected to range from $1.03 million to $1.05 billion. In the same quarter last year, the company reported sales of $977 million.

Non-GAAP EPS for Q2 2024 is expected to be between 73 cents and 77 cents. CDNS reported EPS of $1.22 in the year-ago quarter.

Non-GAAP operating margin in the second quarter is estimated to range from 38.5% to 39.5%.

Performance in detail

In the first quarter, product and maintenance revenues (90.5% of total revenues) of $913 million declined 5.3% year-over-year. Services revenue (9.5%) of $96 million increased 65.5% year-over-year. Our revenue estimates for the Products & Maintenance and Services segments were $945.6 million and $62.7 million, respectively.

Geographically, the Americas, China, Rest of Asia, Europe, Middle East and Africa and Japan contributed 46%, 12%, 20%, 17% and 5%, respectively, to total revenues in the quarter.

In terms of products, custom IC design and simulation, digital IC design and signing, functional verification, intellectual property and system design and analysis accounted for 22%, 29%, 25%, 12% and 12% of total revenue, respectively.

Systems Design and Analysis benefited from AI-based design optimization platforms integrated with physics-based analysis solutions. Digital IC has benefited from the rapid adoption of the full digital flow. During the year, 50 additional customers used CDNS digital solutions.

The functional verification department has benefited from the increasing complexity of system verification and software updates. The Verisium platform has seen increasingly rapid customer adoption. The Custom IC department benefited from the rapid adoption of Virtuoso Studio.

The IP business has benefited from AI-based and multi-chiplet architectures. During the first quarter, CDNS partnered with Intel Foundry to provide design software and IP solutions for multiple high-end Intel nodes.

In the first quarter, total non-GAAP costs and expenses increased 6.1% year over year to $627 million.

Non-GAAP gross margin remained constant at 89.1%. Non-GAAP operating margin decreased 430 basis points year-over-year to 37.8%.

Balance sheet and cash flow

As of March 31, 2024, CDNS had cash and cash equivalents of $1.012 billion compared to $1.008 billion as of December 31, 2023.

Long-term debt was $299.8 million as of March 31, 2024, compared to $299.7 million as of December 31, 2023.

Cadence generated operating cash flow of $253 million in the quarter, compared to $272 million in the prior-year quarter. Free cash flow was $204 million compared to $238 million in the prior quarter. In the first quarter, the company repurchased shares worth $125 million.

How have estimates changed since then?

Investors have witnessed a downward trend in estimate revisions over the past month.

Due to these changes, the consensus estimate moved -18.82%.

VGM results

At this point, Cadence has an average Growth Score of C, although it lags slightly behind its Momentum Score with a D. Plotting a somewhat similar path, the stock is assigned a grade of F on the value side, placing it in the lowest quintile for this investment strategy.

Overall, the stock has a Total VGM Score of D. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, Cadence carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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