Synopsys (SNPS) Up 11.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Synopsys (SNPS). Shares have added about 11.3% 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 its most recent earnings report in order to get a better handle on the important drivers.

Synopsys Reports Q1 Results

Synopsys delivered first-quarter fiscal 2019 non-GAAP earnings of $1.08 per share, beating the Zacks Consensus Estimate of 97 cents. However, the figure was a couple of cents lower than the year-ago quarter’s number.

Revenues grew 6.6% year over year to $820 million and also surpassed the Zacks Consensus Estimate of $797 million.

Strong growth across all product groups plus large and expanded renewals with some key semiconductor companies drove the top-line results. The company’s penetration into new and growing artificial intelligence (AI) chip companies is a major growth driver.

Further, with the growing need for enhanced security measures considering the rising security threats in interconnected systems laden with software, demand for the company’s solutions is shooting up.

Quarter in Detail

Time-Based Products revenues (67.5% of the total generated) came in at $553.7 million, down nearly 4.7% from the year-earlier period. Upfront revenues (15.9%) of $130.5 million surged 42.5% year over year. Maintenance and service revenues (16.6%) rose 27.3% year over year to $136.1 million.

Segment wise, Semiconductor & System Design revenues (90% of total) were $737.9 million, up 5% year over year on the back of strength across the board. This upside can be attributed to the timing of customer shipments. Within the segment, EDA revenues were $497 million and the same from IP & Systems Integration was $240 million. Growth across AI and automotive sectors drove demand for the company’s IP products. 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, which helped it generate strong results in the quarter under review.

The company’s Verification Continuum platform steadily witnesses excellent demand and competitive wins. Management added that robust growth in software-based verification at both traditional semiconductor as well as emerging system companies focused on own in-house design was an upside.

Further, ZeBu Server 4 product is generating a broad-based adoption by customers’ designing storage, networking and AI chips.

Software Integrity revenues grew 29% to 82.5 million, reaching approximately 10% of the total metric in the reported quarter. The company’s investments in this high-growth market are aiding it to diversify its customer base into financial services and medical segments plus expand its reach in the automotive and increase business with well-established electronics clients. Notably, the buyout of Black Duck is assisting it to address the security vulnerabilities faced by various companies.

Geographically, Synopsys’ revenues in North America (51% of total) were $414.5 million while Revenues in Europe (10%) were $83.9 million.

Asia Pacific revenues (31%) were $256.9 million whereas revenues in Japan (8%) were $65.1 million.

Margins

Per ASC 505, non-GAAP operating margin contracted 180 basis points (bps) year over year to 17.1%. Per ASC 606, non-GAAP operating margin was 24.5%.

Semiconductor & System Design delivered an adjusted operating margin of 26.5% while that of Software Integrity came in at 6.8%.

Balance Sheet & Cash Flow

Synopsys exited the fiscal first quarter with cash and cash equivalents of $592.3 million compared with $723.1 million at the end of the previous quarter.

During the reported quarter, the company used $144 million of cash in operational activities.

The company repurchased its stock worth $29 million during the quarter under review. Since 2016, it returned more than $1.2 billion to shareholders and expects buybacks to be a key component of its capital allocation strategy.

Guidance

Although geo-political challenges are an unrelenting concern, growing investments in critical chip and system designs by electronics companies led to maintaining the company’s fiscal 2019 outlook. Revenues are projected in the range of $3.29-$3.34 billion. Non-GAAP earnings per share are forecast between $4.20 and $4.27.

For the fiscal second 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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 15.96% due to these changes.

VGM Scores

Currently, Synopsys has a poor Growth Score of F, however its Momentum Score is doing a lot better 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 F. 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 #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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