Synopsys Falls on Q2 Earnings Miss

Zacks

Shares of Synopsys Inc. (SNPS) went down 3.2% in after-hours trading following the release of its second quarter of fiscal 2014 results. The company reported adjusted earnings per share (including stock-based compensation and excluding all one-time items) on a proportionate tax basis of 56 cents, which missed the Zacks Consensus Estimate of 60 cents. Also, earnings decreased 5.6% on a year-over-year basis.

On a GAAP basis, earnings per share came in at 40 cents compared with 44 cents in the year–ago period.

Quarter Details

Total revenue for the quarter stood at $517.7 million, up 3.7% on a year-over-year basis and ahead of the Zacks Consensus Estimate of $514.0 million. Moreover, revenues were also higher than management’s guided range of 505.0 million–$515.0 million. Year-over-year revenues were positively impacted by higher adoption of Synopsys’ products.

License revenues (including time-based and upfront) were $460.5 million, up 5.1% from the year-ago quarter. Maintenance and service revenues decreased 6.2% from the year-ago quarter to $57.2 million.

More than 90% of the second-quarter revenues came from backlog. A single customer accounted for 10% of the revenues in the second quarter.

During the quarter, Synopsys unveiled a number of new products, comprising IC Compiler II, a game-changing heir to its IC Compiler product. It is also worth noting that the company completed the acquisition of Coverity during the quarter.

GAAP gross profit was $403.6 million, up 3.1% from the year-ago quarter. Gross margin decreased 46 basis points (bps) from the year-ago quarter to 77.9% due to higher cost of sales.

GAAP operating expenses in the quarter increased 8.9% on a year-over-year basis to $339.8 million primarily due to the Coverity acquisition. Operating expenses as a percentage of revenues expanded 313 bps from the year-ago quarter to 65.3%.

Synopsys’ GAAP operating income for the quarter was down 19.7% on a year-over-year basis to $124.4 million, primarily due to higher operating expenses as a percentage of revenue. Operating margin declined 359 bps to 12.3% during the same period.  

The company reported GAAP net income of $63.3 million or 40 cents per share compared with $68.7 million or 44 cents per share in the year-ago quarter.

Adjusted net income (including stock-based compensation and excluding all one-time items) on a proportionate tax basis in the same quarter was $87.9 million or 56 cents per share compared with $92.8 million or 59 cents per share in the year-ago quarter.

Cash Flow & Balance Sheet

Synopsys exited the quarter with cash and cash equivalents of $821.6 million compared with $893.1 million at the end of the previous quarter. Accounts receivable were $322.6 million compared with $246.8 million in the year-ago quarter. Long-term debt in the quarter was $60.0 million. Net cash provided by operating activities during the quarter was $37.9 million. During the quarter, Synopsys repurchased 628,000 shares worth $25.0 million.

Guidance

For the third-quarter of fiscal 2014, the company expects revenues in the range of $515.0 million–$525.0 million. The Zacks Consensus Estimate is pegged at $527.0 million. The company expects non-GAAP expenses in the range of $400.0 million–$410.0 million. Management expects non-GAAP earnings per share in the range of 60 cents–62 cents, higher than the Zacks Consensus Estimate of 39 cents per share.

For fiscal 2014, the company expects revenues in the range of $2.05 billion–$2.075 billion, while non-GAAP earnings per share are projected within $2.45–$2.50. The Zacks Consensus Estimate for revenues and earnings is pegged at $2.075 billion and $1.68 per share, respectively. The company expects to generate $425.0-$450.0 million to $475.0 million cash from operations in fiscal 2014.

Conclusion

Synopsys delivered mixed fiscal second-quarter 2014 results, with earnings missing the Zacks Consensus Estimate and revenues beating the same. Revenues improved on a year-over-year basis impacted by higher adoption of Synopsys’ products. The company however provided a modest fiscal third-quarter 2014 guidance.

We believe the company’s recent product launches, acquisitions and deal wins will boost results, going ahead. Moreover, unique intellectual properties and global support provided by the company will likely drive its forthcoming results. Additionally, the company’s acquisition of Coverity will expand Synopsys’ reach in the software quality, testing and security tools market.

However, competition from Cadence Design Systems Inc. (CDNS) and Mentor Graphics Corp. (MENT) coupled with a challenging technology spending environment and uncertainty regarding proper time to realize acquisition synergies keep us on the sidelines.

Currently, Synopsys has a Zacks Rank #3 (Hold). Rambus Inc. (RMBS) is a better-ranked stock in the technology sector with a Zacks Rank #1 (Strong Buy).


 

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