Why Is Cadence (CDNS) Down 28.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Cadence Design Systems (NASDAQ:CDNS). Shares have lost about 28.2% in that time frame, underperforming the S&P 500.

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

Cadence Q4 Earnings & Revenues Rise Y/Y

Cadence Design Systems, Inc. reported fourth-quarter 2019 non-GAAP earnings of 54 cents per share, which increased 3.8% from the year-ago quarter.

Revenues of $599.6 million improved 5.3% on a year-over-year basis.

The year-over-year outperformance can be attributed to robust adoption of the company’s digital & signoff, and IP solutions along with an expanded customer base. Moreover, better-than-expected demand for Tensilica products and robust growth in audio, imaging, computer vision, and machine learning drove revenues.

Quarter Details

Product & Maintenance revenues (94.2% of total revenues) of $565 million advanced 5.7% year over year.

However, Services revenues (5.8%) of $34.6 million declined 2.4% from the year-ago quarter.

Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA), and Japan contributed 46%, 9%, 20%, 18% and 7%, respectively, to total revenues.

Product-wise, Functional Verification, Digital IC & Signoff, Custom IC Design & Simulation, Systems Interconnect & Analysis, and IP comprised 24%, 29%, 25%, 9% and 13% of total revenues, respectively.

Verification Suite, the company’s flagship emulation platform Palladium Z1, witnessed 19 new customer wins while Protium X1 witnessed 11 wins. Moreover, a global marquee customer expanded its hardware footprint with additional Z1 capacity as well as X1, which was one the largest hardware orders ever for Cadence.

Meanwhile, non-GAAP gross margin increased 110 basis points (bps) year over year to 89.7%.

Total non-GAAP costs and expenses increased 6% year over year to $415.1 million.

Non-GAAP operating margin was 30.8%, down 50 bps from the year-ago quarter.

Balance Sheet & Cash Flow

As of Dec 28, 2019, the company had cash and cash equivalents of approximately $705.2 million compared with $655.2 million as Sep 30, 2019.

The company generated operating cash flow of $159.3 million in the reported quarter compared with prior-quarter figure of $138.5 million.

The company repurchased shares worth approximately $75 million in the fourth quarter.

Guidance

For first-quarter 2020, Cadence expects total revenues in the range of $610 million to $620 million. Management guided non-GAAP earnings in the range of 53-55 cents per share.

Non-GAAP operating margin for first-quarter 2020 is expected at around 30%.

For 2020, revenues are projected in the range of $2.545-$2.585 billion. Non-GAAP earnings are expected in the range of $2.40-$2.50 per share.

Further, non-GAAP operating margin for 2020 is expected in the range of 32-33%. Operating cash flow is anticipated in the range of $775-$825 million.

Notably, the guidance for 2020 takes into account the export limitations for certain Chinese customers, two recent acquisitions and the effect of the coronavirus outbreak in China.

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 -17.5% due to these changes.

VGM Scores

At this time, Cadence has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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 this revision indicates a downward shift. Notably, Cadence has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.