Cadence Design Systems Earnings: Solid Demand as Its AI-Based Solutions Take Stage

We maintain our $161 fair value estimate for narrow-moat Cadence Design Systems CDNS after the firm delivered strong second-quarter results that were in line with guidance for revenue and ahead for adjusted EPS. With elevated demand for hardware solutions, management guided to a stronger second half of the year, involving a sequentially stronger third quarter on the top line and a higher full-year outlook. Secular trends such as generative artificial intelligence are supporting adoption for Cadence’s solutions as well as advancing the firm’s own digital, verification, and systems offerings. We were also pleased to see Cadence’s acquisition of Rambus businesses in the quarter, aimed at expanding its digital intellectual property portfolio. While shares were down around 5% afterhours, we view the current levels as overvalued as we think the market is too optimistic on the firm’s growth prospects.

Second-quarter revenue increased 14% year over year to $977 million. Growth was broad-based, led by the verification business impressively expanding 27% year over year, as demand for the Palladium Z2 and Protium X2 hardware platforms continues to accelerate. We were also pleased to hear Verisium, Cadence’s AI-driven verification platform is gaining traction in the market. The system design and analysis business also delivered strong results, growing 23% year over year as customers look for greater cost savings against rising chip complexity. The digital IP business also performed well with 15% year over year growth, supported by increasing adoption of Cadence Cerebrus, which is geared toward automatically optimizing the digital full flow.

Non-GAAP operating margin was 41.8% for the quarter, compared with 42.4% in the year-ago period, and non-GAAP EPS came in at $1.22, up from the prior-year period’s $1.08, which we view as solid.