Synopsys Inc.’s (SNPS) first quarter 2011 earnings per share (EPS) of 39 cents surpassed the Zacks Consensus Estimate of 33 cents.

Revenue

Revenue in the first quarter was $364.6 million, up from $330.2 million reported in the year-ago period. License revenues (including time-based and upfront) were $322.1 million, up from $292.9 million reported in the year-ago quarter. Maintenance and service revenues were $42.5 million, up from $37.2 million reported in the prior-year quarter.

During the first quarter, more than 90% of revenues came from backlog created at the beginning of the quarter. This apart, the company’s upfront revenue accounted for 7.0% of the total revenue.

The company delivered revenue growth across all its product segments, powered by strong sales of its IP and systems products. A single customer accounted for more than 10% of first quarter revenue.

Operating Results

Total gross profit in the first quarter was $280.4 million (76.8% of revenue), up 5.9% from $264.6 million (80.1% of revenue) in the year-ago quarter. Gross profit declined as a result of high cost of sales, which exceeded the growth in revenue.

Total operating expense in the quarter was $233.7 million, up 11.5% from $209.5 million incurred in the year-ago quarter. The year-over-year increase in cost and expense was primarily due to an increase in research and development, as well as a rise in general and administrative expense. Operating margin was 12.8%, down from 16.7% reported in the year-ago period.

GAAP net income in the first quarter was $48.3 million, or 31 cents per share, compared to $132.8 million, or 88 cents in the first quarter of fiscal 2009. Including special items like amortization, acquisition-related costs, facility restructuring charge, and tax benefit from the IRS settlement, the non-GAAP net income in the first quarter was $60.9 million, or 39 cents per share, compared with $42.0 million, or 28 cents in the comparable quarter last year.

Balance Sheet

Synopsys has a decent cash position. On January 31, 2011, cash and short-term investments were $867.1 million compared to $938.5 million at the end of the previous quarter. The company has no long-term debt. Total deferred revenue at the end of the quarter was $565.8 million, compared with $600.6 million in the previous quarter. Days sales outstanding in the quarter was 42 days.

Guidance

For the second quarter of fiscal 2011, the company projects revenues in the range of $386–$394 million. Total GAAP expenses are expected to remain in the range of $319–$338 million. On a non-GAAP basis, expenses are expected in the range of $292–$302 million. The company has projected GAAP earnings per share of 26 cents to 31 cents and non-GAAP EPS of 43 cents to 45 cents.

For full-year 2011, the company expects revenues in the range of $1.5–$1.525 billion. Other income and expenses are expected to be in the range of $1.0–$5.0 million. The company has projected GAAP EPS of $1.03 to $1.20 and non-GAAP EPS of $1.67 to $1.77.

Our Take

Synopsys delivered decent numbers in the first quarter, with minimal improvement in operating performance. The first quarter 2011 guidance is encouraging. Although Synopsys is gaining traction from new products and acquisitions, we believe these will take some time to produce favorable results. This apart, the company is also facing competetion from Salesforce.com (CRM)

We believe Synopsys’ time-based license model has good visibility and cash position is decent.

The company currently has a Zacks #3 Rank (short-term Hold recommendation).

 
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