Synopsys Below Expectations – Analyst Blog

Synopsys Inc.’s (SNPS) second quarter 2010 EPS of 32 cents fell short of the Zacks Consensus estimate of 38 cents.

 

 

Revenue for the second quarter was $338.1 million, almost flat compared to $336.8 million reported in the year-ago period. Revenue for the quarter was in line with the management guidance range of $331.0 million – $339.0 million. License revenue (including time-based and upfront) was $301.4 million, remaining almost flat compared to $299.9 million reported in the year-ago quarter. Maintenance and service revenue was $36.7 million, almost flat compared to $36.8 million reported in the year-ago quarter.

 

During the second quarter, more than 90% of the revenue came from backlog generated at the beginning of the quarter. Synopsys’ systems and IP business again performed very well, mainly attributable to the strong performance in the IP core business. IP and systems represent approximately 13% of the company’s total revenue and is expected to generate around $200 million in annual business for the company in the near future. One customer accounted for slightly more than 10% of the revenues in the second quarter.

 

 

Total gross profit for the second quarter was $269.1 million (79.6% of revenue), down 1.0% from gross profit of $271.8 million (80.7% of revenue) in the year-ago quarter. Gross profit declined as a result of a substantial increase in the cost of sales, mainly attributable to the increase in License cost and increase in the amortization of intangible assets. Total operating expense for the quarter was $224.1 million, up 3.2% from $217.1 million reported in the year-ago quarter. The year-over-year increase in cost and expense was primarily attributable to acquisitions, while the sequential increase was a result of the timing of quarterly expenses. Operating margin for the quarter was 13.3%, down from 16.2% reported in the year-ago period.

 

GAAP net income for the second quarter of fiscal 2010 was $39.5 million, or $0.26 per share, compared to $48.3 million, or $0.33 per share in the second quarter of fiscal 2009. Excluding special items like amortization, stock based compensation, acquisition related cost and tax effect, the non-GAAP net income for the second quarter of fiscal 2010 was $61.9 million, or $0.41 per share, compared to non-GAAP net income of $65.9 million, or $0.45 per share in the second quarter of fiscal 2009. Including the effect of stock based compensation, the adjusted net income per share for the company comes to $0.32.

 

 

Synopsys has a very strong cash position. On April 30, cash and short-term investments were $1.07 billion compared to $1.09 billion at the end of the previous quarter. The company has no long-term debt. Total deferred revenue at the end of the quarter was $543.9 million, compared to $507.4 million reported in the previous quarter. DSO for the quarter increased by 1 day sequentially to 40 days, reflecting a good A/R portfolio. This apart, during the quarter, the company repurchased around 1.1 million shares of Synopsys stock for $25.0 million.

 

For the third quarter of Fiscal 2010, the company expects revenue in the range of $330 million – $338 million. Total GAAP expenses are expected to remain in the range of $275 million – $292 million. On a non-GAAP basis, expenses are expected to remain in the range of $251 million – $261 million. The company has projected GAAP earnings per share of $0.21 to $0.27 and non-GAAP EPS of $0.36 – $0.38.

 

For full year 2010, the company expects revenue in the range of $1.340 billion – $1.355 billion. Other income and expenses are expected to be in the range of $4.0 million – $8.0 million. The company has projected GAAP earnings per share of $1.56 to $1.75 and non-GAAP EPS of $1.52 – $1.62.

 

Synopsys delivered mediocre second quarter results, without any improvement in operating performance. The 2010 guidance does not reflect any meaningful growth. Although Synopsys is gaining traction from new products, acquisitions, and new EDA partnerships, we believe these will take some time to produce favorable results.

We believe Synopsys’ time-based license model has good visibility and the company has a decent cash position. Additionally, the semiconductor industry is stabilizing leading to a strong demand in the near future. This apart, the company is facing customer concentration risk.

 

We currently have a long-term Neutral recommendation on the stock, with a Zacks #3 Rank.