Cadence Design Systems (CDNS): $335

Cadence, like Synopsis (SNPS) is the second part of the duopoly that dominates chip design software. Synopsis and Cadence control 90% of this market with their EDA (Electronic Design Automation) tools and have been doing so for close to two decades. Even Siemens has a hard time competing with them. TSMC (TSM), Nvidia (NVDA) and the whole high performance computing, and AI industries would not be able to do as well without these two.

So the drop from yesterday’s pre-results closing of $351 is a good opportunity to buy, which we did.

Q3 Results

Non-GAAP EPS of $1.93 beats by $0.14.

Revenue of $1.34Bn (+7.2% Y/Y) beats by $20M.

Excellent order book: Quarter-end backlog $7.0Bn with revenue recognition of $3.5Bn in the next 12 months.

Guidance is higher than previous estimates.

For fiscal year 2025: 

Revenue of $5.262Bn to $5.292Bn vs consensus of $5.25Bn

GAAP operating margin 27.9% to 28.9%

Non-GAAP operating margin 43.9% to 44.9% 

GAAP diluted EPS $3.80 to $3.86

Non-GAAP diluted EPS $7.02 to $7.08 vs consensus of $6.93

Management was very upbeat on the call, emphasis mine.

Yes, yes. Harlan, what I'd add there is demand remains very strong, particularly across AI, HPC and auto markets. We've seen scaling -- we've been scaling manufacturing capacity and trying to improve lead times. We've also had hardware gross margins become more healthy. We remain focused on throughput to meet the elevated need from AI designs. And if you look at our financials this quarter, you'll see that we've been building inventory to try and meet the demand that's reflected in the pipeline for the next 6 months.

Given the ongoing strength of our business, we are raising our full year outlook to approximately 14% revenue growth and 18% EPS growth.

A lot of the growth is coming in design IP. And the reason for that is our IP business is focused on AI and HPC at the most advanced nodes. Since we got started later in the IP business, we focused it where the future is going, which is AI, HPC and chiplet-based architecture. So a lot of the -- like SerDes and PCIe and HBM4 IPs. And that part of the market is doing well actually across the world.And then the second reason is, as you know, there is more and more foundries entering and especially at advanced nodes. And we have a long-standing partnership with TSMC, but also Samsung, Intel and now Rapidus. So there are at least 4 major foundries now at leading nodes.

I would just like to add that the mix as well is healthy across EDA, IP, hardware and SDA. And the core EDA and IP backlog is weighted towards multiyear recurring arrangements, and that supports durable double-digit growth.

They see huge demand potential in physical design, because of node migration from 5nm to 2nm, where the industry is spending Billions to get a 10% to 20% improvement, which Cadence can do at scale and provide huge value.  Cadence has probably improved chip design 100x in the last 20 years, and AI can give the next 10x. In chip design the workload is exponential, and the chips in 5 years from now will be like 5, 10x bigger. The complexity will be 20, 30x more, given software and chiplet, ensuring that their workload is exponential.

The China cloud also seems to have lifted, according to management.

Yes, Lee, that's a good question on China. I mean, overall, I would say the behavior in China, from what I can tell, is back to normal. Of course, there was a disruption in Q2 for obvious reasons, given the policy in Q2. But the behavior that we are seeing is back to normal in Q3. And a lot of it was driven by like us prioritizing hardware deliveries that we could not do in Q2 into Q3. But overall, design activity is strong in China across -- I mean, semiconductors are essentials to every country, and China continues to invest in semis.

Cadence is expensive no doubt, but with 18% earnings growth and 14% revenue growth it's fine, the bigger picture is their pole position in the fastest growing industry (AI) in the economy.

Further, the multi-year arrangements confirm that this can be sustainable and recurring revenue.