Synopsys Posts In-Line EPS

Zacks

Synopsys Inc. (SNPS) reported earnings per share (EPS) of 38 cents in the fourth quarter of 2012, in line with the Zacks Consensus Estimate.

Revenue

Revenue in the fourth quarter stood at $454.2 million, up 16.3% from $390.5 million in the year-ago period. For fiscal 2012, revenue increased 14.3% from fiscal 2011 to $1.756 billion.

The quarterly revenue includes $9 million contribution from acquired SpringSoft (December 2012) and EVE. The yearly revenues include $60 million contribution from Magma, which was acquired in Feb 2012. Organic business was strong during the quarter.

License revenues (including time-based and upfront) were $395.9 million, up 15.1% from $343.8 million in the year-ago quarter. Upfront revenue was 6.3% of the total revenue and was well within the company’s targeted range of less than 10.0%.

Maintenance and service revenues were $58.3 million, up 24.7% from $46.7 million in the prior-year quarter.

Operating Results

Gross profit in the fourth quarter was $351.7 million (77.4% of the total revenue), up 15.2% from $305.1 million (78.1% of revenues) in the year-ago quarter. Gross margin declined by 70 basis points, as the growth in cost of production slightly exceeded the growth in revenue.

Total operating expense in the quarter was $312.2 million, up 25.5% from $248.8 million in the year-ago quarter. Research & Development (R&D), Sales & Marketing (S&M), General & Administrative (G&A) expenses also increased considerably in the quarter. Operating margin for the quarter was 8.7% versus 14.4% in the year-ago quarter.

GAAP net income in the reported quarter was $29.1 million or 19 cents per share, down from $39.9 million or 27 cents per share in the year-ago quarter. Excluding special items like amortization, acquisition-related costs, facility restructuring charge, facility restructuring charges, non-GAAP net income in the quarter was 38 cents per share, inching up from 37 cents in the year-ago quarter.

Balance Sheet

Synopsys has a decent cash position. As of October 31, 2012, cash and cash equivalents were $700.4 million compared with $963.8 million at the end of the previous quarter.

Guidance

For the first quarter of 2013 the company expects revenue to be in the range of $468.0 million - $478.0 million, while GAAP expenses are expected to be in the range of $403 million - $419 million. Moreover, non-GAAP expenses are expected to be between $356 million - $366 million. GAAP earnings per share are expected between 30 cents and 35 cents, while non-GAAP earnings per share are expected to range 54 cents - 56 cents.

For full year 2013, the company expects revenue to be in the range of $1.955 billion - $1.975 billion. GAAP earnings per share are estimated to be $1.32 - $1.46, while non-GAAP earnings per share are projected in the range of $2.26 - $2.31. Cash flow from operations is expected to be $350 million

Conclusion

Synopsys delivered modest fourth quarter 2012 results, with revenue improving substantially but operating margin taking a beating compared with the year-ago period. Inability to tackle the surge in operating expenses led to the decline in operating margin.

Going forward, Synopsys’ financial strength, technology leadership and global support would drive the innovation process. Synopsys is encouraged to boost its innovation process due to the increasing [popularity of the automation and IP industries.

Synopsys’ healthy cash balance will allow the necessary fund for further acquisitions. Also, Synopsys’ product innovation strategy, the popularity of its time-based license model and its tie-up with Advanced Micro Devices Inc. (AMD) encourage us. However, stiff competition from Cadence Design Systems (CDNS), 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).

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