Cadence Design Systems (NASDAQ:CDNS) has been performing spectacularly despite uncertainty involving global trade disruption and high valuations. In the last year, it outperformed the broad semiconductor ETF by about 60%! But, as I’ve written in my past article, Cadence has been posting strong beats, driven strongly by new products, which opens up larger addressable markets and good cost control.
1Q results beat
Cadence reported 1Q19 revenue of $576.7M vs. Street’s expectations of $569.3M while non-GAAP EPS of $0.54 was ahead of Street’s $0.49.
Product & maintenance grew 13.1% yoy to $544M while services slowed -9.5% to $33M.
Adjusted gross margin is about ~88%, which is weaker than the 90% previously guided to due to higher contribution from hardware sales which typically carry lower margins.
On the earnings call, management highlights that its digital and sign-off business grew 12% yoy in revenue, helped by new customer wins, and proliferation by existing customers at advanced nodes. Its IP business also showed similar double-digit growth rates as Tensilica added eight new customers during the quarter and continued to win sockets for machine learning, vision and audio applications in the automotive, consumer and surveillance segments.
In light of new customer wins and repeated orders, the company raised full-year guidance by about $30M to $2.305 billion to $2.335 billion, which is about 9% growth yoy. It expects non-GAAP EPS in the range of $2.04 to $2.12, which at the midpoint implies ~60% yoy growth.
The growth rate in revenue slowed slightly in 1Q compared with 4Q, which was mainly due to lumped up hardware sales which were very strong in 4Q. This has been expected as I wrote before in my last article.
Adjusted EBIT margin beat
1Q adjusted EBIT margin hit 32%, which shows good cost control. Admin, R&D and marketing expenses have been trending lower as a percentage of revenue. Cadence is well on track to deliver FY19E EBIT margin guidance of 30-31%.
New products to help drive growth
Cadence has been actively exploring new growth areas in the system innovation space. This is evidenced by its strategic partnership with Green Hills Software, which brings an estimated $3bn of new opportunities in the embedded system, safety and security space. Similarly, Cadence entered into the predicted ~$4.5bn system analysis market with its new Clarity 3D Solver product that may disrupt existing electromagnetic simulation solutions with flexible delivery such as the cloud. However, this also opens up new competition with incumbents like Ansys (NASDAQ:ANSS).
Valuation: Not cheap
Cadence is currently trading about 34x forward earnings, which puts it at record highs. It has generally negated much of the weakness that Huawei ban and uncertain global trade brought upon semiconductor companies as recent as May. Downstream customers are forced to continue to innovate, design, and test new products, which provides a long-lasting stream of demand for Cadence’s product suites.
The company expects to repurchase $75M per quarter for the remainder of 2019 which should provide a strong support for its shares.
I think Cadence’s growth profile is very robust as evidenced by its stable revenue growth and increasing operating leverage through cost improvements. New growth areas help boost the top line further. Therefore, I still think the company’s shares are worth holding.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: All research, figures, and interpretation are provided on a best effort basis only and may be subject to error. Any view, opinion, or analysis do not constitute as investment or trading advice, please do your own due diligence.