Synopsys Reports Decent 4Q

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Synopsys Inc. (NasdaqGS:SNPS - News) reported fourth quarter 2011 earnings per share (NYSEArca:EPS - News) of 37 cents, missing the Zacks Consensus Estimate of 45 cents per share, but surpassed the 4Q10 EPS of 31 cents. The company was able to drive sales, while keeping expenses under control. Share prices of Synopsys rose 68 cents to $28.65 in after market trading, after gaining 3.4% in the regular trading session.

Revenue

Revenue in the fourth quarter was $390.5 million, up 3.9% from $375.5 million in the year-ago period. More than 90% of the fourth quarter revenue came from backlog in the beginning of quarter, while upfront revenue constituted about 5.0% of the total fourth quarter revenue and 6.0% of the fiscal 2011 revenue. This is inline with the target range of less than 10.0% upfront revenue.

License revenues (including time-based and upfront) were $343.8 million, up from $331.5 million reported in the year-ago quarter. Upfront revenue was 5.1% of the total revenue, well within the company’s targeted range of less than 10.0%. The average length of the company’s renewable customer license commitments for both the quarter and fiscal year was about 2.7 years. The company is also witnessing contract duration revisions to match particular design cycles.

Maintenance and service revenues were $46.7 million, up from $43.9 million reported in the prior-year quarter.

Operating Results

Gross profit in the fourth quarter was $305.1 million (78.1% of the total revenue), up 3.2% from $295.7 million (78.8% of revenues) in the year-ago quarter. Gross margin remained almost flat, as there is no major change in product mix or the cost structure of the company.

Total operating expense in the quarter was $248.8 million, down 5.2% from $262.5 million in the year-ago quarter. Research & Development, sales and marketing, G&A expenses also declined considerably in the quarter. Operating margin for the quarter was 14.4% versus 8.9% reported in the year ago quarter.

GAAP net income in the reported quarter was $39.9 million or 27 cents per share compared with $25.4 million or 17 cents per share in the fourth quarter of fiscal 2010. Excluding special items like amortization, acquisition-related costs, facility restructuring charge, facility restructuring charges,  non-GAAP net income in the fourth quarter was $53.7 million or 37 cents per share compared with $47.2 million or 31 cents in the comparable quarter last year.

Balance Sheet

Synopsys has a decent cash position. As of Oct 31, 2011, cash and cash equivalents were $855.1 million compared with $840.5 million at the end of the previous quarter. The company has no long-term debt. Capital expenditures in the quarter were $15.0 million. Day’s sales outstanding in the quarter were 45 days.

During the quarter, the company repurchased 1 million shares in the open market for $25.0 million and also entered into an accelerated share repurchase agreement worth $75.0 million.

Acquisition

The company also announced its plans to acquire Magma Design Automation Inc., a chip design software manufacturer. Board of directors of both the companies has approved the acquisition, and the transaction is currently subject to Magma shareholders’ vote and regulatory approvals. The deal is expected to close during the second quarter of 2012.

Guidance

For the first quarter of fiscal year 2012, the company expects revenues in the range of $412.0 - $420.0 million. Non-GAAP operating expenses are estimated in the range of $310.0 - $320.0 million. GAAP earnings per share are projected between 33 cents and 38 cents and non-GAAP earnings per share in the range of 51 - 53 cents.

For fiscal 2012, revenues are expected in the range of $1.64 billion to $1.67 billion. GAAP earnings per share are estimated between $1.28 and $1.44, while Non-GAAP earnings per share are estimated in the range of $1.93 - $1.99. Cash flow from operations is expected to be $300.0 million.

Our Take

Synopsys delivered solid results in the fourth quarter, with good operating performance and cost control. The company also announced the acquisition of Magma Design, which is expected to boost profitability, but integration risks persist.

The first quarter 2011 guidance is encouraging. Although Synopsys is gaining traction from new products and acquisitions, we believe these will take some time to produce favorable results. Besides, the company is also facing competition from Cadence Design Systems (NasdaqGS:CDNS - News).

The company currently has a Zacks #3 Rank (short-term Hold rating).

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