Artificial intelligence: Cadence designs chips and increases turnover

Digitisation of the economy. Artificial Intelligence (AI) boom. Internet of Things. These are some of the dominant phenomena in technological development as we know it today. A development that would be impossible without the so-called 'silicon factory'. That is: the global microchip supply chain.

It is a world where, apart from the integrated giants that do more or less everything in-house, semiconductor architecture - which emerged from a laboratory in California - flies to Taiwan. Here - also thanks to Dutch machinery (photolithography 'made' in Asml) and raw material supplied by Japanese companies - the microprocessor is forged on 'silicon' by the Tsmc on duty. Thus identified, the chip is - finally - assembled and tested with technologies from companies not infrequently different from each other. In short: the sector is complex. A sector which - in principle - can be divided into three major stages. The second and third stages (wafer fabrication and function and assembly testing respectively) are the best known. And yet, the first constitutes an essential moment in the microprocessor supply chain. It is represented - essentially - by the so-called 'design'. That is to say, the design of the microprocessor architecture, which - it must be remembered - can contain up to a trillion transistors. This is a very high value-added step. A front where there are those who - among other things - provide the 'computer pencil' (the software) to design the microchip. This is the case of the US company Cadence Design Systems.

The Californian multinational has as its target market - above all - the so-called Eda. What is this? It is the automatic design of the architecture of hi-tech solutions. In general, the company creates software and platforms to design, simulate, and assemble electronic and semiconductor systems. More specifically, Cadence divides its revenues by product categories. Well: at the end of the third quarter of 2024, the area that generated the most sales (27%) was 'Functional Verification, Including Emulation and Prototyping Hardware'. There are various activities in this sector: from the use of hardware to simulate the behaviour of the electronic solution to the creation of the physical version of the integrated circuit design using hi-tech platforms. The second and third segments - by weight of turnover - are 'Digital IC Design and Signoff' (24%) and 'Custom IC Design' (19%). The first segment covers products and services dedicated to the design and final verification of digital integrated circuits (Signoff is the phase where the chip is validated at the level of technical and production requirements). The second, on the other hand, covers software for the design of customised semiconductors. Finally - outside the core business of Eda - there is, on the one hand, the world of IP (pre-defined design blocks), which accounted for 14% of sales; and, on the other hand, system design (not individual microprocessors), which generated 16% of revenues (again in Q3 2024).

Against such a backdrop, one of Cadence's atout is well understood: business diversification. The feature has helped the group's accounts in no small measure. In the third quarter, the company achieved a turnover of USD 1.2 billion, up 19% compared to the same period in 2023. The group's operating income, on the other hand, was 350 million compared to 292.9 million a year earlier. Finally: diluted earnings per share (EPS). This was $0.87, down from $0.93 in the previous year's third quarter. It will be said: the income statement, therefore, is not so positive. The market does not agree with this statement. The decline in net profitability was the effect of financial management (higher expenses) only. On the contrary, operational activity increased, so much so that the stock market - in the wake of the publication of the quarterly report - rewarded Cadence: the share price gained 12.5% in a single session.

Beyond percentages, what, in concrete terms, are the company's strengths? Analysts - according to Seeking Alpha - identify several. First and foremost - they point out - is the ecosystem of design and verification platforms. An IT habitat that - in the event of a switch to other suppliers - requires very high 'transmigration costs'. Above all, in terms of new technological skills and timing. Not only that. Cadence Deisgn has a strong position in hardware testing with the Palladium platform. The ability - is the indication of the experts - to test some of the most complex systems on chips gives the company an important competitive advantage, precisely because microprocessors are becoming increasingly complicated. In this sense, the CEO of Nvidia - which is a customer of Cadence - called Palladium the only 'more important appliance than its fridge'. More. Analysts point to three other aspects that reinforce the 'moat' around the Californian group's business. The first is Cadence's own use of Ia in its products. Which makes the latter more efficient. The second is partnerships with various semiconductor bigwigs (from Broadcom to Qualcomm and Nvidia itself). A condition which, combined with a recurring revenue model, allows the company to have visibility over revenue and - hence - investments to be made. The third aspect - common to all companies in the sector - is finally the fact that Eda requires high skills. Therefore, the danger of facing new competitors is not too high. True! There is a need to stay on the frontier of innovation with the risk of missing the train of the latest invention. And, however, the bottom line does not change: the high sophistication of the industry greatly reduces potential competitors.