Why is tenure (CDNS) down 28.2% since the last earnings report?

It’s been about a month since Cadence Design Systems (CDNS) last reported earnings. The stock lost about 28.2% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cadence waiting for a breakout? Before we dive into the recent reaction from investors and analysts, let’s take a quick look at the company’s most recent earnings report in order to get a better handle on the important factors influencing the situation.

Cadence Earnings and revenues in the fourth quarter increase y/y

Cadence Design Systems, Inc. reported fourth-quarter 2019 non-GAAP earnings of 54 cents per share, up 3.8% from the same quarter last year.

Revenues of $599.6 million increased 5.3% year-over-year.

The improved year-over-year performance can be attributed to the company’s solid adoption of digital, signature and IP solutions, as well as an expanded customer base. Additionally, higher-than-expected demand for Tensilica products and strong growth in the audio, imaging, computer vision and machine learning industries contributed to revenues.

Quarter details

Products and maintenance revenues (94.2% of total revenues) of $565 million increased 5.7% year-over-year.

However, services revenue (5.8%) of $34.6 million decreased 2.4% compared to the same quarter last year.

Geographically, the Americas, China, Rest of Asia, Europe, Middle East and Africa (EMEA) and Japan contribute to total revenues with 46%, 9%, 20%, 18% and 7% respectively.

On the product side, functional verification, digital IC and signing, custom IC design and simulation, system interconnection and analysis, and IP accounted for 24%, 29%, 25%, 9%, and 13% of total revenue, respectively.

Verification Suite, the company’s flagship emulation platform, Palladium Z1 recorded 19 new customer wins, and Protium X1 recorded 11 wins. Additionally, the global tent customer expanded its hardware footprint with additional Z1 capacity as well as X1 capacity, one of the largest hardware orders in Cadence history.

Meanwhile, non-GAAP gross margin increased 110 basis points (bps) year-over-year to 89.7%.

Total non-GAAP costs and expenses increased 6% year-over-year to $415.1 million.

Non-GAAP operating margin was 30.8%, down 50 basis points from the same quarter last year.

Balance sheet and cash flow

As of December 28, 2019, the company had cash and cash equivalents of approximately $705.2 million compared to $655.2 million as of September 30, 2019.

During the quarter, the company generated operating cash flow of $159.3 million, compared to $138.5 million in the prior quarter.

In the fourth quarter, the company repurchased shares worth approximately $75 million.

Conductivity

Cadence expects total first-quarter 2020 revenue in the range of $610 million to $620 million. Management assumed the company’s non-GAAP earnings would be 53-55 cents per share.

Non-GAAP operating margin for the first quarter of 2020 is expected to be approximately 30%.

Projected revenues for 2020 will range from $2.545 to $2.585 billion. Non-GAAP earnings are expected to be in the range of $2.40 to $2.50 per share.

Additionally, non-GAAP operating margin for 2020 is expected to be 32-33%. Operating cash flow is expected to be between $775 million and $825 million.

In particular, the 2020 guidance takes into account export restrictions for certain Chinese customers, two recent acquisitions and the impact of the coronavirus outbreak in China.

How have estimates changed since then?

Over the last month, investors have seen a downward trend in estimate revisions. Due to these changes, the consensus estimate moved -17.5%.

VGM results

At this point, Cadence has a great Growth Score of A, although it lags well behind its Momentum Score of F. Plotting a somewhat similar path, the stock is rated D on the value side, putting it in the bottom 40% for this investment strategy.

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

Perspectives

Estimates for this company generally show a downward trend, and the scale of this correction indicates a downward shift. Notably, Cadence carries a Zacks Rank #2 (Buy). We expect an above-average rate of return on shares in the coming months.

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