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Synopsys (SNPS) Q4 Earnings & Revenues Top, Issues FY18 View

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Continuing its earnings streak for the seventh consecutive quarter, Synopsys Inc. SNPS, yesterday, delivered stellar fourth-quarter fiscal 2017 results, wherein the top and bottom line both came ahead of the respective Zacks Consensus Estimate. The results also marked year-over-year improvement.

The company reported non-GAAP earnings per share (excluding stock-based compensation expenses and all one-time items) of 69 cents, which came in 10.4% higher than the year-ago quarter’s adjusted earnings of 77 cents. The Zacks Consensus Estimate for the quarter was pegged at 57 cents.

The robust year-over-year bottom-line performance was mainly driven by strong revenue growth and efficient cost management.

Despite reporting strong quarterly results, shares of Synopsys fell as much as 3.4%, yesterday. This may be due to increasing operating expenses and declining operating margins.


Nonetheless, Synopsys stock has gained 47.2% year to date, substantially outperforming the 40.3% rally of the industry it belongs to.

Quarter in Detail

The company’s fourth-quarter revenues jumped 9.9% year over year to $696.6 million and came ahead of the previously guided range of $642-$657 million. Reported revenues also surpassed the Zacks Consensus Estimate of $653 million.

On a year-over-year basis, revenues were positively impacted by higher adoption of Synopsys’ products, along with strength in IP and hardware products. Notably, per the company “Our three-year backlog grew approximately $150 million to $3.7 billion, reflecting very good business growth and the timing of large contract renewals.”

Segment wise, License revenues (including time-based and upfront) were $602.7 million, up nearly 7.1% from the year-ago quarter. Maintenance and service revenues surged 32.5% year over year to $93.9 million.

During the quarter, Synopsys announced the acquisition of Black Duck Software, a leader in automated solutions for securing and managing open source software. The addition of Black Duck's Software Composition Analysis solution will enhance Synopsys' product offering and will expand customer reach consequently boosting the top line.

Total non-GAAP costs and expenses increased 15.9% on a year-over-year basis to $566 million. Also, as a percentage of revenues, the same increased 430 basis points (bps) from the year-earlier quarter to 81.3%. The increase in total cost and expenses were primarily due to higher costs related with acquisitions, employee compensation and cost of goods sold for hardware sales.

Synopsys’ non-GAAP operating income was down 9.9% on a year-over-year basis and came in at $130.6 million. Operating margin also contracted 420 bps on a year-over-year basis to 24.1%. Higher operating expenses impacted the operating results.

The company’s non-GAAP net income for the quarter came in at $106.5 million, marking year-over-year decline of 10.5%.

Balance Sheet & Cash Flow

Synopsys exited the quarter with cash, cash equivalents and short-term investments of $1.048 billion million compared with $1.302 million at the end of the previous quarter. Accounts receivables were $451.1 million compared with $411.3 million in the last quarter.

During 12 months ended Oct 31, 2017, the company generated $634.6 million of cash flow from operational activities. The company repurchased $400 million worth of its common stock during the year. The company has remaining $400 million for its current authorization.

Fiscal 2017 Highlights

The company reported fiscal 2017 revenues of $2.725 billion which jumped 12.5% year over year. Non-GAAP earnings per share for fiscal 2017 came in at $3.42 compared with $3.02 per share for fiscal 2016.

Guidance

Synopsys provided the first quarter and 2018 outlook. The company expects 2018 revenues to be in the range of $2.88-$2.91 billion (mid-point $2.895 per share). Black Duck is expected to contribute approximately $55 million to $60 million revenues in 2018. Excluding the impact of Black Duck acquisition revenues are projected in the range of $2.820-$2.855 billion. The Zacks Consensus Estimate for revenues is pegged at $2.80 billion.

Non-GAAP earnings per share are projected between $3.46 and $3.53 (mid-point $3.495 per share). Per the company “We expect it to be approximately $0.12 dilutive to 2018 non-GAAP EPS, reach breakeven on a non-GAAP basis by the second half of 2019 and be accretive thereafter.” Excluding the impact of Black Duck acquisition non-GAAP earnings per share are projected in the range of $3.58-$3.65 per share. The Zacks Consensus Estimate is pegged at $3.59 billion.

Operating cash flow is expected to come in the range of $500-$550 million.

Apart from this, the company initiated guidance for the fiscal first quarter. The company expects revenues in the range of $740-$765 million (mid-point $752.5 million). The Zacks Consensus Estimate for revenues is pegged at $669.1 million. The company expects non-GAAP expenses within $560-$570 million. Management expects non-GAAP earnings per share in the range of 98 cents and $1.02 per share. The Zacks Consensus Estimate is pegged at 85 cents.

Our Take

Synopsys posted impressive fourth-quarter results. Revenues as well as earnings improved year over year, mainly due to strength in hardware and IP products. Additionally, the company’s first-quarter and fiscal 2018 guidance are encouraging.

Synopsys is a vendor of electronic design automation (EDA) software to the semiconductor and electronics industries. We believe the company’s recent product launches, acquisitions and deal wins will boost results, going ahead. Furthermore, unique intellectual properties and global support provided by the company are likely to drive near-term performance. Additionally, the acquisition of Cigital and Codiscope will enable Synopsys to offer a comprehensive software security signoff solution to its customers.

However, competition from Cadence Design Systems Inc. CDNS and Mentor Graphics Corp., a challenging technology spending environment and uncertainty regarding the exact time of realizing acquisition synergies keep us on the sidelines.

Currently, Synopsys carries a Zacks Rank #3 (Hold).

Couple of better-ranked stocks in the same industry space are NVIDIA Corporation NVDA and Intel Corporation INTC, both carrying a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIAand Intel have long-term expected EPS growth rates of 11.2% and 8.4%, respectively.

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