It has been about a month since the last earnings report for Cadence Design Systems (CDNS). Shares have added about 9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Cadence due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Cadence's Q3 Earnings & Revenues Top Estimates

Cadence reported third-quarter 2024 non-GAAP earnings per share (EPS) of $1.64, which beat the Zacks Consensus Estimate by 13.9%. The bottom-line number increased 30.2% year over year, exceeding management’s guided range of $1.39-$1.49.

Revenues of $1.215 billion topped the Zacks Consensus Estimate by 2.7% and increased 18.8% year over year. The figure surpassed management’s guided range of $1.165-$1.195 billion. Recurring revenue growth improved in low teens year over year.  The top line was driven by broad-based strength across the portfolio. It ended the quarter with a backlog of $5.6 billion and current-remaining performance obligations of $2.9 billion.

The company highlighted that the design activity continues to be robust especially in datacenter and automotive verticals, owing to transformative generational trends such as hyperscale computing, 5G and autonomous driving, bolstered by the proliferation of AI. Cadence solutions are also witnessing rapid uptake as system companies endeavor to build next-gen AI and agentic AI products amid increasing chip complexity.

It remains focused on expanding its portfolio across core EDA, IP and System Design and Analysis areas. Expanding collaborations along with solid demand for new hardware systems particularly at AI, hyperscale and automotive companies are other tailwinds. 

Customers have been significantly increasing their R&D budgets in AI-driven automation. This bodes well for the Cadence.AI portfolio. It noted that sales for its Cadence.AI portfolio (powered by GenAI, AI-driven optimization and JedAI platform) nearly tripled year over year.  

Management tightened its outlook for 2024 following strong third quarter performance. Revenues for 2024 are now projected to be in the range of $4.61-$4.65 billion compared with the previous guidance of $4.6-$4.66 billion. Non-GAAP EPS for 2024 is expected to be between $5.87 and $5.93 compared with the previous guidance of $5.77- $5.97. 

The non-GAAP operating margin for 2024 is now forecasted to be in the range of 42% to 43% compared with 41.7-43.3% guided earlier.  Also, operating cash flow is expected to be between $1 billion and $1.2 billion. It expects to utilize 50% of the free cash flow to repurchase its shares in 2024.

Segment Performance

Product & Maintenance revenues (90.5% of total revenues) of $1.1 billion rose 13.9% year over year. Services revenues (9.5%) of $115 million increased 101.8% year over year. Our estimate for revenues from the Product & Maintenance and Service segments was $1,085.8 million and $96.5 million, respectively. Geographically, the Americas, China, Other Asia, Europe, the Middle East and Africa, and Japan contributed 50%, 13%, 17%, 14% and 6%, respectively, to total revenues in the reported quarter.

Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, Intellectual Property and Systems Design & Analysis accounted for 19%, 24%, 27%, 14% and 16% of total revenues, respectively.

The System Design & Analysis business benefited from the multi-physics portfolio along with AI-driven design optimization platforms, with revenues from this segment increasing 40% year over year. Acquisition of BETA CAE and higher demand for its Clarity and Celsius solutions were other tailwinds.

Core EDA business (which constitutes Custom IC, Digital IC and Functional Verification businesses) witnessed 9% year-over-year revenue growth in the third quarter. Demand for the new hardware systems was the primary catalyst along with the rapid adoption of digital full-flow solutions and Virtuoso Studio. Virtuoso Studio won 30 new logos in the reported quarter.

The IP business benefited owing to increasing demand for solutions (PCIe, UCIe, DDR, HBM and high speed SerDes) in AI, HPC and chiplet use cases, with revenues from the segment up 50% year over year.

Margin Performance

Total non-GAAP costs and expenses increased 11.3% year over year to $671 million.

Non-GAAP gross margin contracted 200 basis points (bps) to 88.6%. Non-GAAP operating margin expanded 370 bps on a year-over-year basis to 44.8%.

Balance Sheet & Cash Flow

As of Sept. 30, 2024, Cadence had cash and cash equivalents of $2.786 billion compared with $1.059 billion as of June 30.

Long-term debt was $2.475 billion as of Sept. 30, 2024, compared with $998.9 million as of June 30. It issued $2.5 billion of senior notes at a weighted average interest rate of 4.44% in September 2024.

Cadence generated an operating cash flow of 410 million in the reported quarter compared with the prior quarter’s $156 million. Free cash flow was $383 million compared with $127 million in the previous quarter.

The company repurchased its shares worth $150 million in the third quarter.

Q4 Outlook

For the fourth quarter of 2024, revenues are estimated to be in the $1.325-$1.365 billion band. The company reported sales of $1.069 billion in the year-ago quarter. Non-GAAP EPS for the fourth quarter is anticipated to be between $1.78 and $1.84. It reported an EPS of $1.38 in the year-ago quarter. 

Non-GAAP operating margin is estimated to be between 45.2% and 46.2% for the fourth quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -9.58% due to these changes.

VGM Scores

At this time, Cadence has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cadence has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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