Cadence Design Seen With Strong Profit, Sales Gains


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There's nothing like a new CEO to whip a sagging business back into shape.

Add to that rising product demand, and you've set the stage for a new growth phase. That's been the way things have played out for electronic design automation software vendorCadence Design Systems ( CDNS ).

Cadence develops software used by semiconductor and electronic system customers to design integrated circuits and electronic devices. After losing money in 2008 and 2009 as the recession took its toll on the semiconductor industry and Cadence struggled with internal issues, the company began to rebound in 2010 and has been on a roll with hefty gains ever since.

Key to its success have been the efforts of Chief Executive Lip-Bu Tan, who took the helm in early 2009. Tan, along with a new management team to support him, gave the company a good overhaul.

Deal Quality

Tan and his team revamped the company's business practices to focus on deal quality rather than short-term bookings and revenue, says analyst Richard Valera of Needham & Co. The strong adherence to deal quality, he says, set the foundation for much more predictable, sustained growth over the next several years.

"Their execution on rebuilding the infrastructure of the company and its renewal pipeline, which had been depleted by the aggressive practices of prior management, has enabled Cadence to generate significantly above industry-average growth," he adds.

That it has, and then some. Cadence has logged nine straight quarters of double-digit sales growth. Earnings have climbed by at least double digits in the same time.

If followers are on target, Cadence should keep up its double-digit gains when it reports fourth-quarter results Wednesday after the close. Analysts polled by Thomson Reuters see earnings rising 12% to 19 cents a share. They forecast an 11% gain in revenue to $340.7 million.

If analysts are right, that would represent a slowdown in its growth rate from the past several quarters. In the third quarter, earnings rose 50% to 21 cents a share, topping views. Revenue grew 16% to $338.5 million. It was the eighth straight quarter Cadence beat analysts' forecasts for both sales and earnings.

Piper Jaffray analyst Gus Richard estimates Cadence will see 11% top-line growth in the fourth quarter vs. a year earlier and a 13% increase in earnings per share.

"That's a little bit of a deceleration, but we'll see how it comes out," he said. "They have consistently met expectations over the last eight or nine quarters. I don't expect that to change."

In addition to software, Cadence also offers emulation hardware that lets customers verify that the chip and software they're designing in conjunction with it are working prior to manufacturing the chip. This enables designers of chips for game consoles and other consumer electronics to speed their products to market using hardware simulators to run software on a "virtual" chip long before the actual chip exists.

Valera says the market for emulation hardware began to surge in 2011. And Cadence, which is the leader in the emulation hardware market, benefited from this surge, which continued through 2012. Although the growth in its emulation hardware business was modest in 2012 relative to 2011, he adds, it's still been a good source of upside for Cadence throughout 2012, likely including the fourth quarter.

While Cadence has enjoyed a steady string of quarterly "beats," Valera says it will be difficult for Cadence to continue to exceed estimates to the same magnitude it has for the last couple of years.

"Being four years into their recovery, we think some of the tail winds from normalization of their license model and renewal pipeline will be fading and that the magnitude of beats in revenue and earnings they've been delivering is likely to mitigate as we proceed into this year," he said.

Cadence and its peers -- which includeSynopsys Inc. ( SNPS ), Mentor Graphics Corp . ( MENT )and Magma Design Automation -- are benefiting from the trend toward smaller and more-complex chips for smartphones, tablets and other devices.

Necessary Tools

"There's hardly any microprocessor or chip on the planet that will not have been touched by software from this company and its competitors," said Griffin Securities analyst Jay Vleeschhouwer. "It's become impossible to design them without the use of these software tools."

As the complexity of chips has increased and their size has gotten smaller and smaller, he adds, it requires new types of software and an upgrading of tools to make them.

"The shift to a post-PC era, new products and form factors are stimulating design activity," said Richard in a report.

"Companies likeMicrosoft ( MSFT ),Google ( GOOG ), Apple (AAPL) and others are increasingly designing their own chips to take advantage of the shifting landscape and drive their ecosystems' growth."

Watchers expect Cadence's 2013 earnings to rise 49% to 76 cents a share. They see a 20% pop in 2014.

"I think they'll continue to grind out operating margin improvements and low double-digit revenue growth in calendar 2013," said Richard. It's not a rocket ship. It's a slow grind higher."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
More Headlines for: CDNS , GOOG , MENT , MSFT , SNPS

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