Synopsys' Q3 Earnings Beat, Up Y/Y, Guides Weak Revenues

Synopsys Inc. (SNPS) reported third-quarter fiscal 2014 adjusted earnings per share (including stock-based compensation and excluding all one-time items) on a proportionate tax basis of 55 cents, which surpassed the Zacks Consensus Estimate of 35 cents. Also, earnings increased 16.8% on a year-over-year basis.

On a GAAP basis, earnings per share came in at 42 cents compared with 33 cents in the year–ago period.

Quarter Details

Total revenue for the quarter stood at $521.8 million, up 8.1% on a year-over-year basis. The Zacks Consensus Estimate for the quarter was $522.0 million. Reported revenues came within management’s guided range of 515.0 million–$525.0 million. Year-over-year revenues were positively impacted by higher adoption of Synopsys’ products and the Coverity acquisition.

License revenues (including time-based and upfront) were $462.8 million, up 8.4% from the year-ago quarter. Maintenance and service revenues increased 5.6% from the year-ago quarter to $59.0 million.

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

It is worth mentioning that during the quarter, Synopsys collaborated with Intel Corp. (INTC) to facilitate the adoption of Intel's 14 nanometer (nm) Tri-Gate process technology by Intel Custom Foundry customers.

GAAP gross profit was $406.3 million, up 10.6% from the year-ago quarter. Gross margin increased 181 basis points (bps) from the year-ago quarter to 77.9% due to lower cost of sales and a higher revenue base.

GAAP operating expenses in the quarter increased 8.6% on a year-over-year basis to $339.1 million, primarily due to the Coverity acquisition and higher research and development, sales and marketing, and general and administrative expenses. Operating expenses as a percentage of revenues increased 31 bps from the year-ago quarter to 64.9%.

Synopsys’ GAAP operating income for the quarter was up 22.2% on a year-over-year basis to $67.2 million, primarily due to operational efficiency coupled with higher revenue base. Operating margin increased 149 bps to 12.9% during the same period.

The company reported GAAP net income of $65.7 million or 42 cents per share compared with $52.3 million or 33 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 $87.2 million or 55 cents per share compared with $74.4 million or 47 cents per share in the year-ago quarter.

Cash Flow & Balance Sheet

Synopsys exited the quarter with cash and cash equivalents of $903.0 million compared with $821.6 million at the end of the previous quarter. Accounts receivable were $238.9 million compared with $322.6 million in the year-ago quarter. Long-term debt in the quarter was $52.5 million. Cash flow from operating activities during the quarter was $340.0 million. Synopsys did not repurchase any shares during the quarter.

Guidance

For the fourth-quarter of fiscal 2014, the company expects revenues in the range of $537.0 million–$547.0 million. The Zacks Consensus Estimate is pegged at $548.0 million. The company expects non-GAAP expenses in the range of $410.0 million–$420.0 million. Management expects non-GAAP earnings per share in the range of 59 cents–69 cents, higher than the Zacks Consensus Estimate of 37 cents per share.

For fiscal 2014, the company expects revenues in the range of $2.055 billion–$2.065 billion, while non-GAAP earnings per share are projected within $2.48–$2.50. The Zacks Consensus Estimate for revenues and earnings is pegged at $2.067 billion and $1.55 per share, respectively. The company expects to generate approximately $500.0 million cash from operations in fiscal 2014.

Conclusion

Synopsys delivered modest fiscal third-quarter 2014 results. Both earnings and revenues improved on a year-over-year basis impacted by the higher adoption of Synopsys’ products and the Coverity acquisition. The company however provided a tepid fourth-quarter and fiscal 2014 revenue 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).

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