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Synopsys Inc. (SNPS - Analyst Report) reported earnings per share (EPS) of 59 cents in the second quarter of 2013, well ahead of the Zacks Consensus Estimate of 45 cents.

Revenues

Revenues in the second quarter stood at $499.3 million, up 15.4% from $432.6 million in the year-ago period. The company witnessed good business volume, across all its business segments. More than 90% of the total second-quarter revenue came from the backlog that the company had at the beginning of the second quarter. A single customer accounted for slightly more than 10% of the revenues in the second quarter.

License revenues (including time-based and upfront) were $438.3 million, up 13.7% from $385.9 million in the year-ago quarter. Upfront revenues were 4.9% of the total revenue and well within the company’s targeted limit of less than 10.0%.

Maintenance and service revenues were $60.9 million, up 30.4% from $46.7 million in the prior-year quarter.

Operating Results

Gross profit was $391.5 million (78.4% of the total revenue), up 17.9% from $332.0 million (76.8% of revenues) in the year-ago quarter. Gross margin declined as the company was unable to control its cost of sales.

Total operating income for the quarter was $79.5 million, up 363.9% from $17.1million in the year-ago quarter. Sales & Marketing (S&M), General & Administrative (G&A) expenses declined compared to the year-ago quarter. Operating margin for the quarter was 15.9% versus 4.0% in the year-ago quarter.

GAAP net income in the reported quarter was $68.7 million or 44 cents per share, up from $20.9 million or 14 cents per share in the year-ago quarter. Excluding special items like amortization, acquisition-related costs, facility restructuring charge, facility restructuring charges, non-GAAP net income in the quarter was 59 cents per share, lower than the 43 cents reported in the year-ago quarter.

Balance Sheet

As of Apr 30, 2013, cash and cash equivalents were $681.0 million compared with $500.4 million at the end of the previous quarter. Accounts receivable were $251.7 million, down from $270.2 million in the year-ago quarter.

Guidance

For the third quarter of fiscal 2013, the company expects revenues in the range of $475–$485 million. The company expects GAAP expenses in the range of $411–$428 million. While GAAP earnings per share are expected in the range of 28 cents – 34 cents, Non-GAAP earnings per share are expected in the range of 53 cents – 55 cents.

For the full year 2013, the company expects revenues in the range of $1.955 – $1.975 billion, while GAAP earnings per share are expected in the range of $1.48 – $1.56 and non-GAAP earnings per share are projected within $2.37–$2.42.

Conclusion

Synopsys delivered modest second-quarter 2013 results, with a substantial jump in revenues and EPS substantially exceeding the Zacks Consensus Estimate. The company also delivered substantial growth in the gross and operating margins.

Some of the unique intellectual properties provided by Synopsys with the help of its financial strength, technology leadership and global support will likely drive the innovation process. Synopsys is optimistic about enhancing the innovation process based on the increasing popularity of the automation and IP industries.

The company still has a good cash reserve that is necessary for funding further acquisitions. Moreover, Synopsys is coming up with new products to attract a greater number of customers and its tie up with Advanced Micro Devices Inc. (AMD - Analyst Report) encourages us.

However, stiff competition from Adobe Systems (ADBE - Analyst Report) and Advent Software (ADVS - Snapshot Report), a challenging technology spending environment and uncertainty regarding proper time to realize acquisition synergies keep us on the sidelines.

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

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