Cadence Design Systems Earnings: Pleasing Start to the Year Supported by Robust Demand

Narrow-moat Cadence Design Systems CDNS delivered solid first-quarter results that met management’s expectation for revenue and exceeded guidance for adjusted EPS. Although management guided to sequentially lower second-quarter revenue, it was confident of a stronger second half of the year thanks to more software renewals relative to the first half. Secular trends such as generative artificial intelligence are supporting demand for Cadence’s products as well as enhancing the firm’s own digital, verification, and systems offerings. We maintain our $161 fair value estimate and view the shares as overvalued at current levels; we think the market is too optimistic on the firm’s growth prospects.

First-quarter revenue increased 13% year over year to $1.02 billion. Growth continued to be broad-based, with each segment achieving double-digit growth compared with the prior-year period. We were especially impressed by the verification business growing 32% year over year, with continued demand for the Palladium Z2 and Protium X2 hardware platforms. We also noted strength in the digital integrated circuit business, with increasing demand for Cadence’s generative AI-based solutions. We were pleased with the steadfast growth of the intellectual property business at 11% year over year.

Non-GAAP operating margin was 42.2% for the quarter, compared with 44.0% in the year-ago period, and non-GAAP EPS came in at $1.29, up from the prior-year period’s $1.17.

For the second quarter, management expects revenue of $960 million-$980 million, non-GAAP operating margin of 40%-41%, and non-GAAP EPS of $1.15-$1.19. Management also raised its full-year outlook, now expecting revenue of $4.03 billion-$4.07 billion, up from $4.00 billion-$4.06 billion. Non-GAAP operating margin is expected to be 41.0%-42.2%, and non-GAAP EPS is now expected to come in at $4.96-$5.04, up from the prior range of $4.90-$5.00.