Bull of the day: Cadence Design Systems (CDNS) – May 11, 2022

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Cadence Design Systems (CDN Free Report) is the $40 billion provider of Electronic Design Automation (EDA) and System Design Enablement (SDE) software tools for semiconductor manufacturers. Cadence calls their unique brand and platform capabilities strategy Intelligent System Design.

In reality, Nvidia (NVDA Free Report) is a Cadence customer precisely because Jensen Huang and his engineering teams are so focused on simulating all facets of their chip design and testing.

Through its smart systems design strategy, the company offers software, hardware, services and reusable IC design blocks to electronic systems and semiconductor customers.

Cadence’s leading EDA software and services enable engineers to develop different types of integrated circuits. Its design IPs are directly integrated into the ICs.

Here’s what I wrote back in April 2021 when I recommended CDNS stocks below $130 – they finally hit $190 before the current tech rout…

Link between software and industrial design

Software for designing semiconductors has become increasingly important for at least 3 reasons…

First, transistor architecture has slipped to sub-microscopic levels below 10 nanometers, smaller than the coronavirus.

Second, the proliferation of automotive, mobile, home, factory, and data center applications is accelerating demand and custom solutions for OEMs.

Third, the engineering, testing, and simulation of these ultra-miniature designs are critical before they are shipped to a chip foundry, or “fab.”

(end notes April ’21)

This #1 ranking from Zacks doesn’t come cheap on 11X sales – much like NVIDIA – but after a strong Q1 rally and rally reported in late April, several analyst price targets have topped $200. We will be looking at analyst moves and comments after reviewing some details of the report.

Another beat-and-raise quarter

Cadence posted non-GAAP earnings of $1.17 per share in the first quarter of 2022, which beat Zacks’ consensus estimate of 15.8% and was up 41% year-over-year .

Revenue of $902 million beat Zacks’ consensus estimate by 5% and was up 23% year-over-year. Revenue benefited from continued strength across all segments, driven by increased demand for its products, also reflected in an order backlog of $5.1 billion.

Driven by strong first-quarter results, the company raised its outlook for 2022. Full-year revenue is now projected between $3.395 billion and $3.435 billion, up from an earlier forecast of $3.32 billion to $3.38 billion. dollars.

The Zacks consensus estimate for 2022 rose from $3.36 billion to $3.4 billion, indicating annual growth of 13.8%.

Non-GAAP earnings for 2022 are expected to be between $3.89 and $3.97 per share, compared to previous guidance of $3.70 to $3.80 per share. The Zacks consensus estimate for 2022 earnings then fell from $3.73 per share to EPS of $3.89, suggesting annual growth of 18.25%.

Performance details

In the first quarter, product and maintenance revenue (93.8% of total revenue) of $846 million increased 21% year-over-year. Services revenue (6.2%) of $56 million increased 51.4% over the year-ago quarter figure.

Geographically, Americas, China, Rest of Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 47%, 16%, 18% respectively , 14% and 5% to total turnover for the quarter under review.

In terms of products, custom IC design and simulation, digital IC design and approval, functional verification, intellectual property, and system design and analysis contributed 22% respectively. , 27%, 28%, 13% and 10% of total revenue.

The company’s digital and endorsement businesses drove 23% year-over-year revenue growth. Digital Full Flow saw strong traction with 15 new customers won. The company’s Cadence Cerebrus solution has accelerated and has been deployed by multiple customers.

The Palladium and Protium (particularly Z2 and X2) platforms have seen continued momentum with many contracts won. The company noted that it gained 10 new customers and 50 repeat orders in the first quarter, more than half of them for both platforms. Most of the contracts won were from customers in the areas of hyperscale, AI/ML and networking.

In 2021, Cadence launched 13 new products, including Cadence Helium Virtual and Hybrid Studio, Midas Safety platform and Allegro X.

Cadence’s systems design and analysis business grew 22% year-over-year.

Analyst reactions

CDNS PT rose to $215 from $205 at KeyBanc: Analyst Jason Celino pointed to first-quarter revenue of $45 million on an overall basis and 2022 revenue guide’s rise of $56 million dollars at the midpoint of $3.395 billion to $3.435 billion.

CDNS PT fell to $203 from $211 at Baird: Analyst Joe Vruwink retained an outperform rating on the stock and said he remained a long in the stock following his earnings report as all business groups saw their strength increase with recurring revenue increasing by 19% and initial revenue increasing by 49%. %. He raised the outlook for the full year given the strength of the first quarter, the increase in the second quarter and the favorable evolution of the order book.

CDNS PT rose to $193 from Needham’s $185: Analyst Charles Shi noted another quarter of beating and rallying proves Cadence can accelerate growth and boost margins despite macroeconomic headwinds – inflation and semiconductor cycles – which weighed on most software and chip stocks.

Shi also observes that his recent conversations with investors indicate growing interest in EDA stocks like Cadence Design, which is “increasingly seen as a potential hedge against a recession and the semiconductor cycle.”

In this week’s Top Stock Picks video, I highlight why I think Shi’s comments are noteworthy and why I think you can buy CDNS stocks now under $140, as they exhibit good relative strength against the Semi wider sector.

Disclosure: I own NVDA stock for the Zacks TAZR Trader wallet.

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