Cadence Design Systems (CDNS, Financial) has had a particularly good 2020 driven by the acceleration of digitization due to Covid-19 as well as moving generational trends like 5G, artificial intelligence, data analytics and hyperscale computing.
The company is seeing a growing number of repeat orders with customers including giants like STMicroelectronics and Realtek, and is well equipped to gain from the launch of innovative tools like Sigrity X. With the new launches, Cadence Design should be able to reduce the time taken in their design cycles and expedite their product delivery.
In addition to that, management is expecting to triple its total addressable market through its comprehensive intelligent system design strategy and the acquisition of NUMECA. Overall, I think the company is well-positioned to grow and has an excellent track record of delivering strong financial results, which makes me optimistic about the business in the long run.
Financial performance
Cadence delivered a series of good results in 2020, and its Q4 result was particularly encouraging. The company reported revenue of $759.91, a 26.74% growth as compared to the $599.56 million in the prior-year quarter. Cadence managed to surpass the analyst consensus estimate of $732.27 million for the quarter and generated a healthy gross margin of 90.32% and an operating margin of 25.73%, which was above that in the corresponding quarter of the previous year. The top-line growth was largely a function of the increasing utilization of the company's offerings in the chips and systems design industry.
Cadence reported net income of $173.74 million and adjusted earnings per share (EPS) of 83 cents in the fourth quarter, easily surpassing the Wall Street expectations of 74 cents. In terms of cash flows, Cadence reported $135.52 million in the form of operating cash flows in Q4 2020.
The NUMECA acquisition
Cadence went ahead and closed its acquisition of NUMECA International, a key player in the computational fluid dynamics (CFD) space, in January 2021. This should be a strong acquisition for the company's business, broadening its system analysis portfolio with CFD solutions.
As per the management, the company tripled its total addressable market by adding CFD technology which is one of the largest market segments with a lot of vertical applications. The CFD market size is estimated at $1.6 billion as per the management's recent press release. It is worth highlighting that NUMECA has over 450 customers, including big names such as NASA and Ford (FORD), and these are spread across multiple verticals such as aerospace, automotive, industrial and marine.
Additionally, NUMECA's technology will contribute to Cadence's best-in-class system analysis solutions for integrated circuits, electronic subsystems and full system design. Many customers face challenges in areas such as internal and external flows, acoustics, heat transfer, fluid-structure interaction and optimization, and with continued innovation, Cadence is determined to address these critical design challenges.
Overall, the acquisition should make the company significantly competitive in its domain as against peers like Autodesk (ADSK, Financial), Ansys (ANSS, Financial) and Synopsys (SNPS, Financial).
Launch of Sigrity X
Cadence Design has recently announced its next-generation Sigrity X signal and power integrity solutions, which can deliver up to 10 times faster system analysis with uncompromised accuracy. Sigrity X comprises powerful new simulation engines and the massively distributed architecture of the flagship Cadence Clarity 3D solver. It has the ability to resolve the size and scalability challenges of system-level simulations that are often faced by companies in the 5G communications, automotive, hyperscale computing, aerospace, and defense industries.
With its use, simulations that used to take more than a day to complete can now be completed in just a few hours, and this keeps the company up in thriving markets that demand time-to-market schedules. It is worth mentioning that the technology not only reduces the time for analyzing many designs but also extends this capability to larger and more complex designs that previously could not be analyzed. This positions Cadence in direct competition with Ansys within the product design and development simulations space, particularly within the 5G and the autonomous vehicles spaces. I am optimistic that these frequent product launches and expansion of the product portfolio will help drive the company's market position in the long run.
Final thoughts
As we can see in the chart above, Cadence's stock price has followed its revenue trajectory more or less consistently. There has also been a strong level of multiple expansion as well when we look at the evolution of the enterprise-value-to-revenue ratio.
The company is currently trading at an enterprise-value-to-revenue multiple of 12.72 and a price-earnings ratio of 58.78, which are not low by any standards. However, it is important to note that Cadence is rock solid from a financial standpoint, with a cash-to-debt ratio of 2.02 and a debt-to-Ebitda ratio of 0.57, implying a very low risk associated with capital gearing. With such high margins and low debt, I think the company will be able to maintain the high valuation multiples. In my view, given the huge potential of Sigrity X and the NUMECA acquisition, the company is an ideal candidate for a growth strategy.
Disclosure: No positions.
Read more here:
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