Cadence Design Systems (CDNS)
Quarterly Results
Cadence Design Systems, Inc. (Nasdaq: CDNS) yesterday announced results for the second quarter of 2023.
CDNS is an American electronic design automation (EDA) company. EDA is a software industry that provides computer-aided design (CAD) tools for the design, analysis, and verification of electronic systems. Cadence is a leading provider of EDA tools and services, and its products are used by semiconductor companies around the world.
Out of a total of 10,600 employees, 6,800 are R&D engineers while 2,200 are Field engineers. CDNS has 26 Global Development Centres and has 1,600 patents.
Cadence operates in two main segments:
Silicon Design and Verification: This segment provides tools and services for the design and verification of integrated circuits (ICs). Cadence's products in this segment include logic synthesis, physical design, and verification tools.
Silicon Intellectual Property (IP): This segment provides IP blocks for use in IC designs. Cadence's IP blocks include logic, memory, and analog blocks.
We have not looked at CDNS before but we have done a detailed review of SNPS which is a very similar company. The detailed SNPS report can be seen here and contains more detail on the sector.
The top left had side of the diagram above shows where these two companies sit in the broader Semiconductor value chain.
Cadence reported second quarter 2023 revenue of $977 million, compared to revenue of $858 million for the same period in 2022, an increase of 14%. CDNS achieved a operating margin of 31%. The quarter saw Net income of $221 million ( +18%).
In the last five years, the company has grown revenues at a CAGR of 12% on average and net profits have grown at an average of 25% CAGR. Therefore, the growth numbers reported yesterday showed slower growth than the average of the last five years.
“Cadence delivered excellent results for the second quarter of 2023, with strong ongoing customer demand for our innovative technologies,” said Anirudh Devgan, president and chief executive officer. “With its unparalleled promise, Generative AI is beginning to make a significant impact globally. Our dedicated focus on AI over the past several years, combined with our computational software expertise and invaluable data that lies at the core of AI, uniquely positions us to deliver to the tremendous potential of this transformative technology.”
“We achieved another quarter of strong financial results and are raising our revenue, operating margin and EPS guidance for 2023 yet again,” said John Wall, senior vice president and chief financial officer. “Our revenue outlook for the second half represents a year-over-year growth of approximately 15%, allowing us to raise our 2023 revenue guidance to more than 14% growth over 2022.”
CDNS’s Customers include, Nvidia, Tesla, SK Hynix, Micron, Tesla etc. The company claims between 85% and 90% can be characterised as recurring revenues.
The Earnings Conference Call
Like many other companies, CDNS emphasised they see Generative AI is as a big opportunity.
They believe their AI focus in the last few years and computational software expertise puts them in a sweet spot to benefit from the generative AI opportunity.
Their customers are increasing R&D expenditure and this is driving demand for EDA Tesla and Nvdia were mentioned as key customers. CDNS noted that Jensen Huang had publicly noted CDNS was a key partner for Nvidia. Tesla uses CDNS products and services for its Dojo supercomputer chips.
Core EDA remains a focus but the company has expanded into System Design Analysis and targeting Life sciences in the future
Apart from chip companies, CDNS is also seeing strong demand from large Cloud Hyperscalers and the Auto companies.
CDNS announced the Acquisition of some Rambus Inc IP assets .
CDNS sees massive opportunities and pledged to continue to invest in EDA and AI to server customers and partners
Summary
CDNS is a fast growing company which is likely to continue to grow strongly for the next few years. It has consistently achieved low teen revenue growth and double digit profit growth.
It has achieved operating margins of around 30% and has been a strong generator of free cash flow.
The stock has performed strongly over the last few years.
CDNS aims to use 50% of Operating Cash Flow to buyback shares.
The company’s forecast of 15% revenue growth and 19% net profit growth was seen as a little disappointing by the market.
Conclusion
The stock has traded up strongly and is trading on a current Forward Price Earnings Ratio of 57 times.
Intuitively. this P/E multiple feels a little high given that Operating Margins and ROE are both around 30%.
However, the fact that growth is likely to be strong and 85% of revenues may prove to be supportive for multiples. We currently rate both SNPS and CDNS as a Hold.