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Synopsys Inc. (SNPS - Analyst Report) reported earnings per share (EPS) of 43 cents in the second quarter of 2012, missing the Zacks Consensus Estimate of 45 cents per share.

Revenue

Revenue in the second quarter stood at $432.6 million, up 9.9% from $393.7 million in the year-ago period. The company witnessed revenue growth across all its product groups, and also exceeded the company’s guidance. Revenue contribution from Magma was modest at $14.0 million.

Around 90% of the second quarter revenue arrived from the backlog at the beginning of the quarter, whereas upfront revenue constituted around 5% of total. Moreover, the average length of the renewable customer license was around 2.7 years, while the average duration of the backlog was about 2.8 years.

License revenues (including time-based and upfront) were $385.9 million, up 4.4% from $343.8 million in the year-ago quarter. Upfront revenue was 5.2% of the total revenue and was well within the company’s targeted range of less than 10.0%.

Maintenance and service revenues were $46.6 million, down from $49.8 million in the prior-year quarter.

Operating Results

Gross profit in the second quarter was $332.1 million (76.8% of the total revenue), up 7.9% from $307.6 million (78.1% of revenues) in the year-ago quarter. Gross margin improved marginally as the company was able to control its cost of production.

Total operating expense in the quarter was $314.9 million, up 23.0% from $256.0million in the year-ago quarter. Research & Development, Sales & Marketing, General & Administrative (G&A) expenses also increased considerably in the quarter. Operating margin for the quarter was 3.96% versus 13.1% in the year ago quarter.

GAAP net income in the reported quarter was $21.0 million or 14 cents per share compared with $81.1 million or 53 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 second quarter was 43 cents per share compared with 10 cents in the year-ago quarter.

Balance Sheet

Synopsys has a decent cash position. As of April 30, 2012, cash and cash equivalents were $796.6 million compared with $811.4 million at the end of the previous quarter. Capital expenditures were $9.0 million for the quarter. Out of the total capital expenditure limit, approximately $272.0 million remains in the company’s share repurchase authorization.

Guidance

For the third quarter of 2012, the company expects revenue to be in the range of $440 million - $448 million. GAAP expenses are expected to be in the range of $371.0 million - $387.0 million, whereas non-GAAP expenses are expected to be in the range of $333.0 million - $343.0 million. GAAP earnings per share are projected in the 29 cents to 34 cents range while  non-GAAP earnings per share are forecasted in the range of 49 cents - 51 cents.

Again for the fiscal year 2012, revenue is expected to be in the range of $1.740 billion - $1.760 billion, while other income and expense are expected in the range of $0 - $3 million. GAAP earnings per share are expected around $1.04 - $1.16, while non-GAAP earnings per share in the range of $2.03 - $2.07

Conclusion

Synopsys delivered modest second quarter 2012 results, with revenue improving on a year-over-year basis, while earnings were lower than expected. On the other hand, the company’s operating performance was weak as the company was unable to control its operating expense, which increased meaningfully.

Moreover, the third quarter and fiscal year 2012 guidance are encouraging. Although Synopsys is gaining traction from new products and acquisitions, we believe these will take some time to produce favorable results. Besides, the company is also facing competition from Cadence Design Systems.

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

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