Cadence's (NASDAQ:CDNS) Q2 Earnings Results: Revenue In Line With Expectations But Quarterly Guidance Underwhelms

Kayode Omotosho /
2023/07/24 4:30 pm EDT

Semiconductor design software provider Cadence Design Systems (NASDAQ:CDNS) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 13.9% year on year to $976.6 million. However, next quarter's revenue guidance of $1 billion was less impressive, coming in 1.55% below analysts' estimates. Cadence made a GAAP profit of $221.1 million, improving from its profit of $186.9 million in the same quarter last year.

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Cadence (CDNS) Q2 FY2023 Highlights:

  • Revenue: $976.6 million vs analyst estimates of $977.2 million (small miss)
  • EPS (non-GAAP): $1.22 vs analyst estimates of $1.19 (2.28% beat)
  • Revenue guidance for Q3 2023 is $1 billion at the midpoint, below analyst estimates of $1.02 billion
  • The company reconfirmed revenue guidance for the full year of $4.07 billion at the midpoint
  • Free cash flow of $393.8 million, up 63.6% from the previous quarter
  • Gross Margin (GAAP): 90.1%, in line with the same quarter last year

“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 the name chosen to reflect the idea of a repeating pattern or rhythm in electronic design, Cadence Design Systems (NASDAQ:CDNS) offers a software-as-a-service platform for semiconductor engineering and design.

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Sales Growth

As you can see below, Cadence's revenue growth has been over the last two years, growing from $728.3 million in Q2 FY2021 to $976.6 million this quarter.

Cadence Total Revenue

This quarter, Cadence's quarterly revenue was once again up 13.9% year on year. However, the company's revenue actually decreased by $45.1 million in Q2 compared to the $121.8 million increase in Q1 2023. Regardless, we aren't too concerned because Cadence's sales seem to follow a seasonal pattern and management is guiding for revenue to rebound in the coming quarter.

Next quarter's guidance suggests that Cadence is expecting revenue to grow 10.8% year on year to $1 billion, slowing down from the 20.2% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 11.6% over the next 12 months.

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Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Cadence's free cash flow came in at $393.8 million in Q2, up 31.1% year on year.

Cadence Free Cash Flow

Cadence has generated $1.13 billion in free cash flow over the last 12 months, an eye-popping 29.8% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Cadence's Q2 Results

With a market capitalization of $66.2 billion, a $873.9 million cash balance, and positive free cash flow over the last 12 months, we're confident that Cadence has the resources needed to pursue a high-growth business strategy.

It was great to see Cadence generate strong free cash flow that beat Wall Street analysts' expectations and also improve its gross margin this quarter. Those really stood out as positives in these results. On the other hand, its underwhelming revenue and non-GAAP EPS guidance for next quarter was disappointing. Overall, the results could have been better. The company is down 4.6% on the results and currently trades at $230 per share.

Cadence may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, and what's happened in the latest quarter. We cover this and more in our full company report, and it's free.

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The author has no position in any of the stocks mentioned in this report.