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Synopsys (SNPS) Q2 Earnings & Revenues Top Mark, Rise Y/Y

Zacks Equity Research

Synopsys Inc. SNPS delivered second-quarter fiscal 2019 non-GAAP earnings of $1.16 per share, beating the Zacks Consensus Estimate of $1.09. The bottom line was also higher than the year-ago quarter’s figure of $1.08.

Revenues grew 7.6% year over year to $836.2 million and also surpassed the Zacks Consensus Estimate of $827 million.

Growing demand for advanced technology, design, IP and security solutions is creating a solid market opportunity for Synopsys. Rising impact of AI, 5G, IoT and big data is boosting investments in new compute and machine-learning architectures, which is a tailwind. Further, with the growing need for enhanced security measures, demand for the company’s solutions is shooting up.

On the contrary, geo-political challenges coupled with uncertainties hovering around government actions to restrict trade with Huawei are a concern. As a result of the trade ban, management mentioned that the company is unable to book new business and recognition of currently contracted revenues is on hold.

Quarter in Detail

Time-Based Products revenues (66.8% of the total generated) came in at $558.3 million. Upfront revenues (17.1%) were $143.4 million. Maintenance and service revenues (16.1%) were $134.5 million.

Segment wise, Semiconductor & System Design revenues (90% of total) were $753 million, up 5% year over year on the back of strength across the board. Within the segment, EDA revenues were $492.7 million and the same from IP & Systems Integration was $259.2 million. A solid progress in fusion technology and platform roll-out is driving EDA revenues. Notably, Fusion Design Platform, launched last November, is witnessing high demand. This, in turn, helped it generate strong results in the quarter under review.

The company’s Verification Continuum platform steadily witnesses excellent demand and competitive wins. Further, ZeBu Server 4 product is generating a broad-based adoption by customers’ designing storage, networking and AI chips.

Software Integrity revenues grew 23% to 83 million, reaching approximately 10% of the total metric in the reported quarter.

Geographically, Synopsys’ revenues in North America (52% of total) were $433.9 million while Revenues in Europe (10%) were $83.5 million.

Asia Pacific revenues (29%) were $246.1 million whereas revenues in Japan (9%) were $72.7 million.

Synopsys, Inc. Price, Consensus and EPS Surprise

Synopsys, Inc. Price, Consensus and EPS Surprise

Synopsys, Inc. price-consensus-eps-surprise-chart | Synopsys, Inc. Quote

Margins

Per ASC 606, non-GAAP operating margin was 25.1%. Semiconductor & System Design delivered an adjusted operating margin of 26.8% while that of Software Integrity came in at 10%.

Balance Sheet & Cash Flow

Synopsys exited the fiscal second quarter with cash and cash equivalents of $631.2 million compared with $592.3 million at the end of the previous quarter.

During the quarter, the company generated $353 million of cash from operational activities.

The company repurchased its stock worth $100 million, bringing the total so far this year to $129 million.

Guidance

For the fiscal third quarter, the company’s revenues are likely to be in the $810-$850 million band. While non-GAAP costs and expenses are anticipated within $620-$640 million. Management assumes non-GAAP earnings per share of $1.07-$1.12.

The company raised its guidance for earnings and also the top-end of revenues for fiscal 2019. Revenues are now projected in the range of $3.29-$3.35 billion compared with $3.29-$3.34 predicted earlier.

Non-GAAP earnings per share for fiscal 2019 are forecast between $4.24 and $4.40, up from $4.20-$4.27 envisioned earlier.

Double-digit growth in non-GAAP earnings is expected to be driven by revenue growth in high-single-digits, reflecting mid-to-high single digits for EDA, low-double-digits for IP and Software Integrity growth in the 20% range.

The company predicts operating margin to be 24.2% in fiscal 2019. Software Integrity business is assumed to be profitable for the year.

The company estimates to boost its operating margin in the high-20s by 2021 and in the longer-term, within the 30% range.

Zacks Rank & Other Stocks to Consider

Synopsys currently has a Zacks Rank #2 (Buy). A few other top-ranked stocks in the broader Computer and Technology sector are Cadence Design Systems CDNS, Rosetta Stone RST and Verint Systems VRNT, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Cadence, Rosetta and Verint is projected at 12%, 12.5% and 11%, respectively.

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