Cadence is a global leader in Electronic Design Automation (EDA) software, which is essential for the design of semiconductors and electronic systems. The company’s tools enable chip makers to increase complexity of chip designs to meet growing demand for advanced computing and connectivity. In the never ending arms race amongst chip makers to build the fastest, smallest chips, Cadence is the arms dealer.

We believe this is a trend that will continue to for years to come and when paired with an excellent balance sheet and strong cash generation, CDNS presents a compelling investment opportunity.

Source: Cadence Design Systems, Inc.

Cadence’s business is split across three major product categories: Electronic Design Automation (76% revenue), System Design & Analysis (12%), and Intellectual Property (12%).

EDA: The EDA business consists of software licenses and hardware sold to customers to design, analyze, and simulate electronic systems and integrated circuits. This software is used from the earliest stages of chip development.

Source: Cadence Design Systems, Inc.

System Design and Analysis: The SD&A business is a newer initiative within Cadence, where they are applying their simulation capabilities to external factors (thermodynamics, fluid dynamics, vibrations etc), allowing customers to test the performance of their chip designs within a larger system.

Intellectual Property: Cadence also sells “building block” intellectual property to their customers. A customer may know they want to develop a chip with a specific communication protocol, but that feature is not the differentiating part of the chip. Rather than spending their engineering resources on a non-differentiating function of the chip they can simply license the IP block for that specific protocol from Cadence.

Source: Cadence Design Systems, Inc.

There are three primary players in the EDA space: Synopsis (#1), Cadence (#2) and Mentor (#3, owned by Siemens).

Synopsis is larger in revenue with some tangential product offerings. Mentor, since its acquisition by Siemens has been ceding share to Cadence and Synopsis. Largely, when it comes to winning new EDA business it is a duopoly with Synopsis and Cadence (with most large customers using both)

The moat around the industry is extraordinarily wide. Manufacturing of chips is an extremely expensive and yield sensitive venture, so no chip maker of significance would risk using an unproven software in the development process.

Source: Cadence Design Systems, Inc.

We initiated a smaller position (2.5%) in Cadence given a still elevated valuation. We will look for opportunities to increase the position over time.

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