Synopsys (SNPS) Up 8.4% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Synopsys (SNPS). Shares have added about 8.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Synopsys due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Synopsys' Q2 Earnings and Revenues Beat Estimates

Synopsys’ second-quarter fiscal 2021 non-GAAP earnings of $1.70 per share beat the Zacks Consensus Estimate by 11.8%. Moreover, the figure improved 39.3% year over year.

Further, revenues increased 18.9% year over year to $1.02 billion and surpassed the Zacks Consensus Estimate by 3.6%, driven by growth across all its business segments.

The company is benefiting from the increasing demand for its products amid the rapid adoption of Big Data, faster computation and Machine Learning. Complex, connected, specialized, and secure chips and systems are gaining strong momentum, driving Synopsys’ business.

Moreover, robust adoption of the company’s Verification Continuum Platform and Fusion Compiler product within the Fusion Design Platform was a major growth driver in the second quarter.

Quarter in Detail

In the license type revenue group, Time-Based Product revenues (63.4% of total revenues) of $648.8 million were up 9.9% year over year. Maintenance and Service revenues (16.2%) improved 17.6% to $166.4 million. Upfront Product revenues (20.4%) grew 15.7% to $209.1 million.

Segment-wise, Semiconductor & System Design revenues (91% of total revenues) were $930.4 million, up 20.4% year over year. Within the segment, EDA revenues (57% of revenues) were $587.6 million and IP & Systems Integration revenues (33% of revenues) came in at $339.6 million. Software Integrity revenues totaled $93.9 million, contributing approximately 9% to the top line in the reported quarter.

Notably, the company updated its reportable geographical segments in the previous quarter. Geographically, Synopsys’ revenues in North America (47% of total) were $479.2 million and $106.2 million in Europe (10%). Revenues from Korea (10%), China (12%) and Other (20%) came in at $105.4 million, $125.5 million and $208.1 million, respectively.

Non-GAAP operating margin was 31%, expanding 530 basis points (bps) year over year. Semiconductor & System Design delivered an adjusted operating margin of 33.2%, up 610 bps year over year, while Software Integrity margin contracted 430 bps year over year to 9%.

Balance Sheet & Cash Flow

Synopsys had cash and cash equivalents of $1.46 billion as of Apr 30, 2021, compared with $1.02 billion as of Jan 31, 2021.

Total long-term debt came in at $25.6 million in the reported quarter, flat sequentially. Outstanding debt of $116 million was lower than the previous quarter’s $123 million.

Operating cash flow in the first quarter was $526 million.

Guidance

For third-quarter fiscal 2021, the company’s revenues are expected between $1.03 billion and $1.06 billion.

Management expects non-GAAP earnings between $1.75 and $1.80 per share.

Non-GAAP expenses are anticipated to be $707-$717 million.

For fiscal 2021, management projects revenues of $4.04-$4.09 billion.

Non-GAAP earnings for the fiscal year are expected between $6.38 and $6.45 per share.

Operating cash flow is expected between $1.25 billion and $1.30 billion.

Further, management expects strong demand for the company’s advanced solutions and cloud computing services along with growing customer acceptance for its new capabilities to drive growth for its robust product portfolio.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 15.09% due to these changes.

VGM Scores

Currently, Synopsys has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Synopsys has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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