Can Cadence Achieve Its 2018 Margin Target?



Margin analysis

Cadence Design Systems (CDNS) reported double-digit growth in its operating income driven by a 31.5% YoY (year-over-year) fall in its expenses related to product and maintenance costs. 

In 4Q17 on a non-GAAP (generally accepted accounting principles) basis, its operating income came in at $150 million, a rise of 20% YoY. Its operating margin in the same period was 29.9%, a rise of 320 basis points. Likewise, in 2017, its operating margin was 27.5% compared to 25.8% in 2016.

On a GAAP basis, Cadence’s operating margin was 16.2% in 4Q17 compared to 11.3% in the previous year’s quarter. Its 2017 operating margin remained at 16.7% compared to 13.5% in 2016.

In the chart above, we can see the company’s operating margin trend on a GAAP basis over the last five quarters, which shows a declining trend. Its operating income grew at a CAGR (compound annual growth rate) of 11.2% over the same period.

Article continues below advertisement

Guidance and headwinds

Cadence’s marketing and sales along with its research and development costs constitute more than 70% of its total operating expenses. Rising costs continue to act as major headwinds for the company’s operating margin growth. 

On a combined basis, the company’s costs have risen 11.3% YoY to $311 million, while in 2017 they were $1.2 billion, a rise of 8.2% YoY. To stay competitive, Cadence needs to invest heavily in new and innovative product development.

The company expects its non-GAAP operating margins in 1Q18 and 2018 to be 26% and 27%, respectively. Cadence also believes that its 2018 operating profitability will improve.

Other software companies Citrix (CTXS) and Akamai (AKAM) also provided margin guidance for 2018. Citrix expects its operating margin to be in the range of 29%–30%, while Akamai expects its operating margin to be 24%.


More From Market Realist