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Why Is Synopsys (SNPS) Up 6.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Synopsys (SNPS). Shares have added about 6.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Synopsys due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Synopsys' Q3 Earnings and Revenues Top Estimates, Up Y/Y

Synopsys’ third-quarter fiscal 2021 non-GAAP earnings of $1.81 per share beat the Zacks Consensus Estimate by 3 cents. Moreover, the figure improved 4% year over year.

Further, revenues surged 96% year over year to $1.06 billion and surpassed the Zacks Consensus Estimate $1.04 billion, driven by growth across all its business segments.

The company is benefiting from the increasing demand for its products amid the rapid adoption of Big Data, faster computation and Machine Learning. Complex, connected, specialized, and secure chips and systems are gaining strong momentum, driving Synopsys’ business.

Moreover, robust adoption of the company’s Verification Continuum Platform and Fusion Compiler product within the Fusion Design Platform was a major growth driver during the third quarter.

Quarter in Detail

In the license type revenue group, Time-Based Product revenues (63% of total revenues) of $665.6 million were up 8.7% year over year. Maintenance and Service revenues (18%) improved 33.4% to $188.6 million. However, Upfront Product revenues (19%) marginally declined to $203.3 million from the year-ago quarter’s $210.9 million.

Segment wise, Semiconductor & System Design revenues (91% of total revenues) were $959.1 million, up 10.2% year over year. Within the segment, EDA revenues (56% of revenues) were $590.3 million and IP & Systems Integration revenues (34% of revenues) came in at $363.8 million.

Software Integrity revenues totaled $98 million, contributing approximately 9% to the top line in the reported quarter.

Geographically, Synopsys’ revenues in North America (46% of total) were $487 million and $112.9 million in Europe (11%). Revenues from Korea (10%), China (16%) and Other (17%) came in at $110.5 million, $164.2 million and $182.6 million, respectively.

Non-GAAP operating margin was 31.9%, contracting 170 basis points (bps) year over year. Semiconductor & System Design delivered an adjusted operating margin of 34.3%, shrinking 110 bps year over year, while Software Integrity margin contracted 700 bps year over year to 8.8%.

Balance Sheet & Cash Flow

Synopsys had cash and short-term investments of $1.53 billion as of Jul 31, 2021, compared with $1.46 billion as of Apr 30, 2021.

Total long-term debt came in at $24.8 million in the reported quarter, down slightly from $25.6 million as of Apr 30.

Operating cash flow in the second quarter was $422 million. During the first nine months of fiscal 2021, the company generated operating cash flow of $1.12 billion.

Guidance

For fourth-quarter fiscal 2021, the company’s revenues are expected between $1.138 billion and $1.168 billion.

Management estimates non-GAAP earnings between $1.75 and $1.80 per share.

Non-GAAP expenses are anticipated to be $805-$815 million.

For fiscal 2021, management projects revenues of $4.19-$4.22 billion.

Non-GAAP earnings for the fiscal year are expected between $6.78 and $6.83 per share.

Operating cash flow is predicted to be approximately $1.35 billion.

Further, management anticipates strong demand for the company’s advanced solutions and cloud computing services, along with growing customer acceptance, for its new capabilities to drive growth for its robust product portfolio.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 9.8% due to these changes.

VGM Scores

Currently, Synopsys has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Synopsys has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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