Cadence Reports Solid Earnings. The Stock Is Falling.

Cadence Design Systems stock is up 117% since the end of 2022. (Cadence / ETAP / Schneider Electric/ Vertiv)

Key Points

• Cadence Design Systems reported third-quarter adjusted earnings per share of $1.93 and revenue of $1.34 billion, exceeding analysts’ estimates.
• The company’s adjusted operating margin for the third quarter was 47.6%, an increase from 44.8% in the previous year.
• Cadence raised its 2025 guidance for sales, adjusted EPS, and adjusted operating margin. The stock fell 1.8% after hours.

Cadence Design Systems reported solid third-quarter earnings results on Monday afternoon. Its shares were down in after-hours trading.

Adjusted earnings-per-share were up to $1.93, above Wall Street’s consensus estimate of $1.79, according to FactSet, and up from $1.64 last year. Revenue for the quarter reached $1.34 billion, better than expectations of $1.32 billion, and up 10% on the year.

Analysts closely watch Cadence’s adjusted operating margin, which came in at 47.6% for the third quarter, again exceeding analyst estimates and up from 44.8% last year.

Cadence also raised its 2025 guidance for sales, adjusted EPS, and adjusted operating margin.

But the overperformance may be dependent on Chinese customers pushing up orders to get ahead of potential U.S. export controls.

Cadence stock was down 1.8% in late trading following the release, erasing today’s gains during normal trading hours.

One thing weighing on the stock may be valuation concerns. Buoyed by research and development of artificial-intelligence chips and a new generation of hardware in the first half of 2025, Cadence sales grew by 22% year-over-year.

Three months ago when Cadence reported its second quarter, the stock shot up 10% the following day on strong results and raised guidance for the year, and the rally continued for a second day. But since then Cadence stock was down 5.3% at the closing bell today, while the tech-heavy Nasdaq 100 was up almost 9%.

Investors also woke up to the possibility that AI-fueled growth has slowed, at least for now. Even the raised 2025 guidance implies a deceleration of growth in the fourth quarter.

Cadence stock is still selling at 45 times earnings-per-share for the next 12 months, according to analysts tracked by FactSet. The stock price is up 119% since the end of 2022, and Cadence will have to continue to beat expectations to keep that valuation intact.

The trade war is likely to also remain the center of attention during the analyst call. A key link in the global chipmaking ecosystem, the company has become a bargaining chip in the U.S. trade negotiations with China, where Cadence got 12% of its revenue last year.

But China represented 18% of sales in the third quarter, most likely the result of Chinese customers trying to get ahead of any future U.S. export restrictions. Investors may be concerned Cadence’ 2025 sales may be too dependent on China, a revenue source it may lose.

In the earnings call, CEO Anirudh Devgan framed the issue as Chinese customers getting “back to normal in Q3,” after a thin second quarter due to export restrictions. Chief Financial Officer John Wall added that Chinese sales came in a little above management’s expectations.

This has been an on-and-off story for Cadence and its nearest competitor, Synopsys . In May, the companies revealed the U.S. Department of Commerce notified them that sales to China would require licenses because they “pose an unacceptable risk of use in or diversion to a ‘military end use’ in China,” according to a Cadence filing. Then, as the countries de-escalated tensions through June, they got an early-July reprieve, and the license requirement was dropped.

But the pendulum keeps swinging. On Oct. 10, Trump announced his intention to impose export restrictions on critical software, presumably including Cadence and Synopsys under that umbrella. Now, at the end of the month, tensions have calmed again. But absent a comprehensive U.S.-China trade deal that keeps them off the table, these companies will remain in limbo, because they are as critical as software gets.

Cadence and Synopsys make chip-design software that automates the process of laying out the tens of billions of transistors that make up modern chips. They also make hardware that is used to test designs for real world applications before they are sent to the factory to make silicon chips. The software-hardware combination is essential to chipmaking, and why it has gotten caught up in the trade war.

Write to Adam Levine at adam.levine@barrons.com