CDNS Stock: 2024 Q1 Earnings Review

Cadence Design Systems, commonly referred to by its stock ticker, CDNS, is a pivotal player in the electronic design automation (EDA) industry. Specializing in software, hardware, and silicon structures, Cadence supports the development of complex integrated circuits and electronic devices. This article delves deep into the Q1 earnings of 2024, providing a detailed analysis of CDNS stock, guided by its past performances, the prevailing economic environment, and industry dynamics.

Participants

Richard Gu: Vice President of Investor Relations.

Anirudh Devgan: President and Chief Executive Officer.

John Wall: Senior Vice President and Chief Financial Officer.

Financial and Performance Report

Q1 2024 Financial Overview

1. Total revenue for Q1 2024 was $1.009 billion.
2. GAAP operating margin stood at 24.8%, while non-GAAP operating margin was at 37.8%.
3. GAAP EPS was reported as $0.91, with non-GAAP EPS at $1.17.
4. Operating cash flow reached $253 million.
5. Cash balance at the end of the quarter was approximately $1.012 billion, with a principal debt of $650 million.
6. Days Sales Outstanding (DSO) were noted as 36 days.
7. The company used $125 million to repurchase Cadence shares during the quarter.

Updated Financial Outlook for 2024

1. Revenue is expected to range between $4.56 billion to $4.62 billion.
2. GAAP operating margin is projected between 31% to 32%, and non-GAAP operating margin between 42% to 43%.
3. GAAP EPS is forecasted from $4.04 to $4.14, with non-GAAP EPS from $5.88 to $5.98.
4. Operating cash flow is anticipated between $1.35 billion to $1.45 billion, with a commitment to use at least 50% of annual free cash flow for share repurchases.

Operational Highlights

Record Backlog and Customer Base Expansion

Exited Q1 with a record backlog of approximately $6 billion, setting a robust foundation for future performance.

Strategic Partnerships and Collaborations

Enhanced partnerships with major industry players like IBM, Global Foundry, Arm, Dassault Systems, and Intel Foundry Services (IFS), focusing on expanding EDA solutions across various technology sectors including aerospace, defense IoT, automotive end-markets, and advanced node design software.

Product and Service Updates

Launch of New Products

Introduction of third-generation dynamic duo: Palladium Z3 emulation and Protium X3 prototyping platforms which offer significant improvements in performance and capacity over previous generations—endorsed by major tech companies like Nvidia, Arm, and AMD.

AI Integration in Products

The Cadence.AI portfolio continues to integrate AI into chip-to-systems design processes enhancing productivity and efficiency across various product lines, such as Cerebrus in digital implementation and Verisium in verification optimization.

System Design Innovations

Launched the Cadence Reality Digital Twin Platform aimed at virtualizing data centers using AI-driven simulations for improved energy efficiency up to an estimated 30%.

Future Outlook and Guidance

Expectations for Upcoming Quarters

For Q2:

• Revenue expected between $1,030 million to $1,050 million.
• GAAP operating margin projected between 26.5% to 27.5%, with non-GAAP margins between 38.5% to 39.5%.
• GAAP EPS forecasted from $0.73 to $0.77; Non-GAAP EPS from$1 .20to$1.24.

Long-Term Growth Drivers

Continued focus on AI integration within all product lines expecting substantial growth especially in hardware accelerated verification systems due to new launches like Z3 X3 systems which are designed for next-generation large-scale integrations required by AI advancements.

In summary: Cadence Design Systems has demonstrated strong financial performance in Q1 FY2024 backed by strategic expansions in its product offerings particularly through AI integration that positions it well for sustained growth amidst evolving technological demands, especially in semiconductor designs influenced by AI developments

Q&A

Joe Vruwink from Baird: Can you provide insights into the outlook for the year and how the second half assumption has changed compared to last quarter?

The management expects strong demand in the second half, with a focus on hardware and IP growth. They anticipate that the impact of new systems like Z3 and X3 will extend beyond this year.

Charles Shi from Needham & Company: How is China revenue performing, and are US export controls impacting business operations there?

The company noted a decline in China revenue due to tough year-over-year comparisons but remains focused on diversification. They are monitoring geopolitical risks to derisk China exposure.

Ruben Roy from Stifel: Could you elaborate on customer adoption trends for Z3 and X3 systems, including potential ASP uplifts?

The management highlighted strong demand for Z3 and X3 systems, expecting customers to transition gradually over one to two quarters. They emphasized the increased capacity and performance benefits of these new systems.

Lee Simpson from Morgan Stanley: What is the status of your partnership with Arm Total Design, especially regarding custom SoCs using Neoverse?

Cadence expressed satisfaction with their partnership with Arm, focusing on backend development work for higher-order designs. They highlighted collaboration in various subsystems requiring close integration with Cadence tools.

Jay Vleeschhouwer from Griffin Securities: How do you expect intra-contract new or expansion business dynamics to impact EDA market health? Also, what are your thoughts on pricing strategy for this year?

The management discussed add-ons as an area of focus beyond software renewals. They aim to proliferate AI tools across accounts before considering pricing adjustments later. Incremental EBIT margin may be impacted by M&A transactions but remains a target goal.

Anirudh Devgan: Can you discuss the adoption curve for Gen AI platforms other than Cerebrus? Are there areas where AI may not be as applicable in the design flow?

Anirudh highlighted strong adoption trends across various Gen AI platforms like verification and PCB design. He mentioned ongoing exploration of AI applications in design generation processes leveraging LLM capabilities.

John Wall: Is SDA expected to be more second-half loaded this year? Do you anticipate SDA growth exceeding overall corporate growth targets?

John clarified that SDA growth was high single digits Q1-over-Q1 despite rounding discrepancies. He expects robust SD&A growth above 10% this year, outpacing overall corporate growth targets.

Vivek Arya from Bank of America Securities: Will all benefits of hardware refresh be realized within this year or extend into 2025? How does recurring revenue growth align with expectations going forward?

Management anticipates continued benefits from hardware refresh extending beyond 2024 into subsequent years. Recurring revenue growth above 10% is expected, reflecting ongoing momentum in core business segments.

Harlan Sur from JPMorgan: Given a relatively flat start for SDA in 2024, do you expect SDA to be more second-half loaded? Will SDA grow faster than overall corporate targets this year?

John projected strong SD&A growth throughout 2024, exceeding overall corporate targets. He emphasized that while Q1 figures may appear flat sequentially, they represent high single-digit annualized growth rates when considering two-year CAGRs.

Disclaimer: This analysis is based on the provided stock chart snapshot and is not a substitute for professional investment advice. Always conduct your own research or consult a financial advisor before making investment decisions. Try Intellectia.AI Usecase to get more details.