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Cadence (CDNS) Stock Declines Despite Q1 Earnings Beat

Cadence Design Systems Inc. CDNS reported earnings of 32 cents per share in first-quarter 2017, which increased 14.3% from the year-ago quarter. It also came in line with the top end of management’s guided range of 30–32 cents.

Including stock-based compensation, the company reported earnings of 25 cents per share, which beat the Zacks Consensus Estimate by 4 cents.

Revenues of almost $477 million increased 6.5% year over year and easily surpassed the Zacks Consensus Estimate of $473 million and was within management’s guided range of $470–$480 million.
 

Cadence Design Systems, Inc. Price, Consensus and EPS Surprise

 

Cadence Design Systems, Inc. Price, Consensus and EPS Surprise | Cadence Design Systems, Inc. Quote

Notably, shares declined more than 4% in after-hour trading following unimpressive second-quarter guidance. Total revenue is expected in the range of $470–$480 million, up 4–6% on a year-over-year basis. However, revenues are expected to be in the -1% to 1% range on a sequential basis. We also note that the revenue range is lower than the current Zacks Consensus Estimate of $481.8 million.

Similarly, non-GAAP earnings are expected to be in the range of 31–33 cents per share, which reflects 7–14% on a year-over-year basis. However, on a sequential basis, the earnings are projected in the range of -3% to 3%. The Zacks Consensus Estimate (including stock-based compensation expense) is currently pegged at 21 cents per share.

Cadence has gained 32.7% as compared with the Zacks Computer Software industry’s return of 11.5% on a year-to-date basis. However, the weak guidance can negatively impact share price momentum, in our view.



Quarter Details

Product and maintenance (94.7% of total revenue) increased 9.6% from the year-ago quarter to $451.4 million. However, services revenues plunged 29.4% to $25.5 million.

Americas, Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 45%, 26%, 20% and 9% of the total revenue, respectively. On a year-over-year basis, contribution from Americas and Japan declined by 4% and 1%, respectively.

Product wise revenues from Functional Verification, Digital IC Design and Signoff, Custom IC Design, System Interconnect and Analysis and IP contributed 23%, 29%, 26%, 10% and 12% of total revenue in the quarter, respectively.

Management noted that semiconductor business conditions have stabilized with growth expected to be in the low-single digit range for 2017. As a part of System Design Enablement (SDE) strategy, the company continues to pursue opportunities in higher growth areas     automotive, cloud infrastructure, machine learning, and aerospace & defense.

The expansion of Renesas agreement reflects Cadence’s growing clout in the automotive market. The company also launched a number of products like Xcelium and Protium S1 during the quarter. These new products won new customers like Xilinx XLNX and Mellanox MLNX.

Strong adoption continued for Palladium Z1, with seven new customers, six of them being systems companies ordering the product in the quarter. Cadence noted that an additional seven customers made repeat orders.

The recently launched Pegasus Verification System is also gaining traction with companies like Texas Instruments TXN and Microsemi buying the same.

Meanwhile, stringent cost control helped operating margin (excluding stock-based compensation) to expand 10 basis points (bps) to 25.6% better than management’s guidance of 25%. Operating margin (including stock-based compensation) contracted 10 bps on a year-over-year basis to 19.9%.

Net cash from operating activities was $92.4 million as compared with $196.9 million in the previous quarter. Cadence ended the quarter with cash and short-term investments of $547.6 million better than $468.3 million at the end of fourth-quarter 2016.

Guidance

For second-quarter 2017, Non-GAAP operating margin is expected to be 26%, which is a slight improvement from 25% achieved in the year-ago quarter.

For 2017, Cadence reiterated previously provided guidance. Total revenue is still forecasted between $1.900 and $1.950 billion, which reflects growth of 5–7%. However, the mid-point of the range is lower than the current Zacks Consensus Estimate of $1.94 billion.

Recurring revenue is still expected to be more than 90%. Revenue from beginning backlog is still anticipated to be almost 70%.

Non-GAAP operating margin is projected to be almost 27%, which is in line with 2016 reported figure.

Non-GAAP earnings are also expected to be in the range of $1.32-$1.42 per share, which reflects almost 13% growth over 2016. The Zacks Consensus Estimate (including stock-based compensation expense) is currently pegged at 94 cents per share.

Zacks Rank

Cadence currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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