Synopsys (SNPS) Beats On Q3 Earnings, Raises FY19 Guidance

Synopsys Inc.’s (NASDAQ:SNPS) third-quarter fiscal 2019 non-GAAP earnings of $1.18 per share beat the Zacks Consensus Estimate of $1.1 and also improved 24% year over year.

Further, revenues grew 9.4% year over year to $853 million and surpassed the Zacks Consensus Estimate of $829.5 million as well.

The company is benefiting from increasing global design activity and customer engagements. Rising impact of “AI, Automotive, 5G, IoT, Cloud and the proliferation of Smart Everything” is boosting demand for its advance solutions.

Despite the unpredictabilitysurroundingthe trade scenario in China and Huawei ban, which affected its revenues, the company raised its guidance for fiscal 2019.

Quarter in Detail

Time-Based Products revenues (63% of the total generated) came in at $537.6 million, down 5.7% year over year. However, Upfront Products revenues (21%) soared 78% to $177.6 million. Maintenance and Services revenues (16%) too grew 25% to $137.8 million.

Segment wise, Semiconductor & System Design revenues (90% of total) were $769.4 million. Solid customer demand coupled with the timing of customer pull downs for IP products was a positive.

Within the segment, EDA revenues were $481.6 million and the same from IP & Systems Integration was $286.2 million

Strong momentum in Fusion Design Platform, launched last November, is a key driver. During the quarter, the company had several contract wins at leading semiconductor companies.

Synopsys is also gaining from more than 30% revenue growth in Custom Compiler, which is fuelled by key wins in the 5G, AI and server chip markets.

The company’s Verification Continuum platform steadily witnesses excellent demand and competitive wins. Large cloud hyperscalers in North America are contributing to robust growth in verification software.

Robust momentum in interface IP coupled with memory and logic IP is driving its IP revenues. Cloud computing is also a major catalyst.

Software Integrity revenues were 83.6 million, accounting for approximately 10% of the total metric in the reported quarter. The launch of Polaris Software Integrity Platform is a tailwind.

Geographically, Synopsys’ revenues in North America (49% of total) were $414 million while Revenues in Europe (11%) were $90.1 million.

Asia Pacific revenues (33%) were $283.2 million whereas revenues in Japan (8%) were $65.7 million.

Margins

Per ASC 606, non-GAAP operating margin was 25.4%. While Semiconductor & System Design delivered an adjusted operating margin of 27%, that of Software Integrity came in at 10.5%.

Balance Sheet & Cash Flow

Synopsys exited the fiscal third quarter with cash and cash equivalents of $686.8 million compared with $631.2 million at the end of the previous reported quarter.

During the quarter, the company generated $370 million of cash from operational activities compared with $353 million sequentially.

The company implemented a $100-million share buyback, thus bringing the total so far this year to $229 million.

Guidance

For the fiscal fourth quarter, the company’s revenues are likely to be in the $830-$860 million band. Non-GAAP expenses are anticipated within $630-$650 million. Management assumes non-GAAP earnings per share of $1.10-$1.15.

The company upped its guidance for fiscal 2019. Revenues are now projected in the range of $3.34-$3.37 billion compared with $3.29-$3.35 predicted earlier.

Non-GAAP earnings per share for fiscal 2019 are forecast between $4.52 and $4.57, up from $4.24-$4.40 envisioned earlier.

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

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

Zacks Rank & Stocks to Consider

Synopsys currently has a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader technology sector are Anixter International (NYSE:AXE) , LogMeIn (NASDAQ:LOGM) and Perficient (NASDAQ:PRFT) , each flaunting 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 Anixter, LogMeIn and Perficient is currently projected to be 8%, 5% and 10.8%, respectively.

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