Shares of Cadence Design Systems (CDNS +0.40%) fell 5.5% in after-hours trading on Monday, after the provider of design solutions for the electronics industry released its first-quarter 2023 report.
The stock's decline is attributable to management's second-quarter guidance coming in lighter than Wall Street had expected for both revenue and earnings. On the other hand, the first quarter's top and bottom lines beat the analyst consensus estimates.
Cadence Design Systems' key numbers
| Metric | Q1 2022 | Q1 2023 | Change YOY |
|---|---|---|---|
| Revenue | $902 million | $1.02 billion | 13% |
| GAAP operating income | $319 million | $323 million | 1% |
| GAAP net income | $235 million | $242 million | 3% |
| Adjusted net income | $324 million | $351 million | 9% |
| GAAP earnings per share (EPS) | $0.85 | $0.89 | 5% |
| Adjusted EPS | $1.17 | $1.29 | 10% |
Data source: Cadence Design Systems. GAAP = generally accepted accounting principles. YOY = year over year.
Wall Street was looking for adjusted EPS of $1.25 on revenue of $1.01 billion. So the company exceeded both expectations. It also met its own revenue guidance ($1 billion to $1.02 billion) and surpassed its adjusted EPS guidance ($1.23 to $1.27).
Cadence Design generated cash of $267 million running its operations during the quarter, down 21% from the year-ago period. It ended the quarter with cash and cash equivalents of $917 million and long-term debt of $648 million.
What happened with Cadence Design in the quarter?
- Recurring revenue accounted for 80% of total revenue.
- Revenue mix by product category was 20% custom integrated circuit (IC) design and simulation, 25% digital IC design and sign-off, 32% functional verification (including emulation and prototyping hardware), 11% intellectual property (IP), and 12% system design and analysis. Relative to the year-ago period, the verification category gained 4 percentage points, while the other categories each lost 2 percentage points. On the earnings call, CEO Anirudh Devgan said that demand for hardware was "broad-based, with particular strength seen in the aerospace and defense and automotive segments."
- It ended the quarter with a backlog of $5.4 billion.
NASDAQ: CDNS
Key Data Points
What the CEO had to say
Here's what Devgan had to say in the earnings release:
Cadence delivered strong results for the first quarter driven by our consistent execution and continued momentum in the core EDA [electronic design automation] and System Design & Analysis businesses. With the recent introductions of Virtuoso Studio and Allegro X AI, we now have an unmatched "chip to package to board to systems" Generative AI portfolio underpinned by our differentiated JedAI platform and delivering unprecedented quality of results and productivity benefits.
Generative artificial intelligence (AI) has recently become a hot topic due in large part to the popularity of OpenAI's ChatGPT. In simple terms, generative AI "enables users to quickly generate new content based on a variety of inputs," in the words of tech giant Nvidia, which is a key player in this space. Inputs and outputs to foundational models can include text, images, sounds, or other types of data.
Guidance
For the second quarter of 2023, management issued the following outlook:
- Revenue of $960 million to $980 million, which would equate to growth of 12% to 14% year over year.
- Adjusted EPS of $1.15 to $1.19, which would equate to growth of 6% to 10%.
Going into the report, Wall Street was modeling for second-quarter revenue of $1.01 billion and adjusted EPS of $1.25. So guidance came up short of estimates on both counts.
For the full year, the company updated its outlook:
- Revenue of $4.03 billion to $4.07 billion, up from prior guidance of $4 billion to $4.06 billion. This would represent annual growth of 13% to 14%.
- Adjusted EPS of $4.96 to $5.04, up from prior guidance of $4.90 to $5. This would represent growth of 16% to 18%.
- The company expects to use about 50% of its free cash flow to repurchase shares.
Going into the report, Wall Street was modeling for full-year 2023 revenue of $4.04 billion and adjusted EPS of $4.98. So, at the midpoint of the ranges, guidance for both the top and bottom lines came in higher than analysts had been projecting.
Worth a spot on your watch list
This snippet from Devgan's remarks on the earnings call summarizes why Cadence stock is worth considering buying, or at least worth watching:
Along with AI, other generational trends such as hyperscale computing, 5G, and the digital transformation across multiple verticals continue to propel thriving design activity across semi[conductor] and systems companies, creating rich market opportunities for our differentiated end-to-end EDA [electronic design automation], IP [intellectual property] and systems solutions.
Shares were trading at 42.6 times expected 2023 earnings based on their price at Monday's close. That's somewhat pricey for shares of a company that's expected to grow 2023 earnings 16% to 18%.
That said, high-quality stocks rarely come cheap. If you like the stock but consider its valuation too rich, you might consider watching it and scooping up shares following a price correction.
