Shares of Cadence Design Systems (CDNS 1.92%) were down 3.7% in after-hours trading on Monday, following the release of the third-quarter 2023 report for the provider of design solutions for the electronics industry.
The likely reason for the decline is fourth-quarter guidance coming in lighter than Wall Street had expected for both revenue and adjusted earnings.
Adding to the weaker-than-anticipated outlook, investors are likely concerned about the prospects for the broad semiconductor industry. Along with inflation still running higher than the Federal Reserve's target rate, there are recent new factors that could affect the macro environment: a war and increased geopolitical tensions in the Middle East, and the U.S. government's expansion of restrictions on the export of certain chips and systems for data centers to China and select other countries.
Cadence Design Systems' key numbers
| Metric | Q3 2022 | Q3 2023 | Change |
|---|---|---|---|
| Revenue | $903 million | $1.023 billion | 13% |
| GAAP operating income | $261 million | $293 million | 12% |
| GAAP net income | $186 million | $254 million | 37% |
| Adjusted net income | $290 million | $343 million | 18% |
| GAAP earnings per share (EPS) | $0.68 | $0.93 | 37% |
| Adjusted EPS | $1.06 | $1.26 | 19% |
Data source: Cadence Design Systems. GAAP = generally accepted accounting principles.
Wall Street was looking for adjusted EPS of $1.20 on revenue of $1 billion. So the company topped both expectations.
Cadence Design generated cash of $663 million running its operations during the quarter, up 1% from the year-ago period. It ended the quarter with cash and cash equivalents of $962 million -- down 6% year over year -- and long-term debt of $649 million.
What happened with Cadence Design in the quarter?
- Recurring revenue accounted for 85% of total revenue, CFO John Wall said in his commentary.
- Revenue mix by product category was 22% custom integrated circuit (IC) design and simulation, 28% digital IC design and sign-off, 26% functional verification (including emulation and prototyping hardware), 11% intellectual property (IP), and 13% system design and analysis. Relative to the year-ago period, the digital IC design and IP categories each lost 1 percentage point, the verification and system design categories each gained 1 percentage point, and the custom IC design category was unchanged.
- Backlog is a healthy $5.4 billion, which is down a bit from $5.8 billion at the end of 2022, according to Wall's commentary.
What the CEO had to say
Here's what CEO Anirudh Devgan had to say in the earnings release:
Generational trends including AI [artificial intelligence], HPC [high-performance computing], and autonomous driving continue to fuel robust design activities, and 3D-IC designs are accelerating. We are excited about the momentum of our JedAI platform-based Generative AI applications that are delivering breakthrough results for our customers."
Generative AI is the tech behind ChatGPT, the highly popular chatbot from OpenAI that exploded onto the scene late last year.
Guidance
For the fourth quarter of 2023, management issued the following outlook:
- Revenue of $1.039 billion to $1.079 billion, which would equate to growth of 15% to 20% year over year.
- Adjusted EPS of $1.30 to $1.36, which would equate to growth of 35% to 42%.
- In Q4, the company expects to buy back about $125 million of its stock, Wall said in the CFO commentary.
Going into the report, Wall Street was modeling for Q4 revenue of $1.07 billion and adjusted EPS of $1.37. So revenue guidance, at the midpoint of the range, came up short, while the entire profit guidance range was below the Street's expectation.
For full-year 2023, the company slightly raised its outlook for the top and bottom lines:
- Revenue of $4.06 billion to $4.10 billion, up from prior guidance of $4.05 billion to $4.09 billion. This would represent annual growth of 14% to 15%.
- Adjusted EPS of $5.07 to $5.13, up from prior guidance of $5.05 to $5.11. This would represent growth of 19% to 20%.
Going into the report, Wall Street was modeling for 2023 revenue of $4.08 billion and adjusted EPS of $5.09. So the revenue guidance, at the midpoint, is in line with the analyst expectation, while the bottom line outlook, at the midpoint, is a bit ($0.01) higher than the Street's estimate.
Worth a spot on your watch list
Given the factors mentioned in the opening, the short term and maybe even the medium term might be somewhat challenging for many companies in the broad semiconductor space. But the longer-term growth prospects for select companies, including Cadence Design, look very bright. As the CEO said in the earnings statement above: "Generational trends including AI, HPC, and autonomous driving continue to fuel robust design activities."
