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

Narrow-moat-rated Cadence Design Systems CDNS reported solid third-quarter results that continue to point to healthy demand for electronic design automation, or EDA, tools across a host of customers and end markets, but with an especially bright future in supporting artificial intelligence, or AI, and high-performance computing, or HPC, applications. Although the third-quarter results weren’t surprising, we reassessed our long-term revenue and earnings estimates and think we may have been too bearish on the rising tide of EDA adoption. Thus, we are raising our fair value estimate to $209 per share from $161. Shares fell a couple of percent after hours as fourth-quarter guidance was slightly below FactSet consensus estimates, but even with the selloff, we still view shares as modestly overvalued.

Revenue in the September quarter was $1.023 billion, up 13% year over year, up 5% sequentially, and just ahead of guidance of $1 billion at the midpoint. Much of Cadence’s revenue (85%) is locked into place in any given quarter, given its subscription model, but management thinks it was too conservative in its forecast for verification hardware installations (part of the remaining 15%) in the September quarter. Nonetheless, Cadence is still experiencing strong demand for tools used in AI and HPC. Adjusted gross margin and operating margin came in at a hearty 90.6% and 41.1%, respectively, although both were down slightly (80 and 70 basis points, respectively) on a sequential basis.

In the December quarter, Cadence expects revenue to be $1.059 billion at the midpoint of guidance, which would be up 3.5% sequentially and 18% year over year. Cadence expects adjusted operating margin to tick back up to 42%, and the firm expects to spend $125 million on stock buybacks in the quarter ahead.