Synopsys Inc. (SNPS) reported third-quarter pro forma EPS of 47 cents that beat the consensus estimate of 41 cents. Quarterly revenue of $345.2 million was in line with consensus expectations and management’s guidance of $342 million to $350 million. However, pro forma EPS exceeded the company’s guidance of 40 cents to 42 cents.

EPS increased 6.8% year over year due to lower operating expenses which slid 4%. As a result, non-GAAP operating margin came in at 27% for the quarter.

Revenue for the quarter was up 0.3% from the year-ago period. While license revenue, including time-based and upfront, accounted for 87.9%, services, including maintenance, accounted for 12.1% of total revenue. Maintenance and service revenue was up 21.8%, offset by a 2.1% year-over-year drop in license revenue. One customer accounted for slightly more than 10% of second-quarter revenue. During the quarter, the company generated more than 90% of sales from the backlog and expects the trend to continue in the coming quarter.

Synopsys has a very strong cash position. As of June 30, cash and short-term investments were $1.08 billion compared to $0.9 billion in the previous quarter. The company has no long-term debt. Total deferred revenue at the end of the quarter was $581.8 million.

Synopsys is benefiting from increasing complexity of semiconductors and challenging shrink cycles that help in driving demand for its software. The company is gaining traction through new products, acquisitions and efficient business execution, which bodes well for growth beyond 2009.

Despite current macroeconomic concerns, Synopsys posted good results and we believe it to be well positioned with a highly ratable licensing model and a strong balance sheet with no debt.

Guidance

Synopsys remains cautions due to the uncertain economy and expects a gradual recovery in 2011. As a result, it offered weak fourth quarter guidance much below our expectation. Revenue is expected to be between $335 million and $343 million, below the consensus estimate of $348.25 million and EPS is expected to be in the range of 29 cents to 33 cents, below the consensus estimate of 34 cents. Operating margin is expected to decline sequentially due to lower sales and traditionally higher quarterly expenses driven primarily by variable compensation.

For the full year, management expects revenue of $1.357 billion to $1.365 billion versus the consensus estimate of $1.37 billion, and EPS of $1.71 to $1.75 versus the consensus estimate of $1.70. While the company has increased its operating cash flow forecast to reflect improved customer collections environment, it expects to exit 2009 with a slightly lower revenue run rate.

Many of its customers are making renewals closer to expiration and Synopsys expects bookings to be low for the rest of 2009. It is currently in the middle of an industry wide weakness, so this is not a company specific issue. It also faces strong competition from Cadence Design Systems Inc. (CDNS), Magma Design Automation Inc. (LAVA) and Mentor Graphics Corp. (MENT).

We have a neutral recommendation on the Synopsys shares.

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