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

Revenue

Revenue in the third quarter stood at $443.7 million, up 14.7% from $386.8 million in the year-ago period. The company witnessed strong business growth and customers are interested to witness new design aggressively even amidst the prevailing uncertain economy.

The average length of renewable customer license commitments was roughly 2.5 years in the quarter.

License revenues (including time-based and upfront) were $388.2 million, up 13.8% from $341.2 million in the year-ago quarter. Upfront revenue was 5.7% of the total revenue and was well within the company’s targeted range of less than 10.0%.

Maintenance and service revenues were $55.5 million, up 21.7% from $45.6 million in the prior-year quarter.

Operating Results

Gross profit in the third quarter was $344.0 million (77.5% of the total revenue), up 13.9% from $302.1 million (78.1% of revenues) in the year-ago quarter. Gross margin declined by 60 basis points, as the growth in cost of production slightly exceeded the growth in revenue.

Total operating expense in the quarter was $280.6 million, up 15.1% from $243.9 million in the year-ago quarter. Research & Development (R&D), Sales & Marketing (S&M), General & Administrative (G&A) expenses also increased considerably in the quarter. Operating margin for the quarter was 14.3% versus 15.0% in the year-ago quarter.

GAAP net income in the reported quarter was $75.7 million or 50 cents per share, up from $52.1 million or 35 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 43 cents per share compared with 47 cents in the year-ago quarter.

Balance Sheet

Synopsys has a decent cash position. As of July 31, 2012, cash and cash equivalents were $963.8 million compared with $796.6 million at the end of the previous quarter.

Guidance

For the fourth 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 $387.0 million - $403.0 million, whereas non-GAAP expenses are expected to be in the range of $345.0 million - $355.0 million.

GAAP earnings per share are projected in the 22 cents to 28 cents range, while non-GAAP earnings per share are forecasted in the range of 46 cents - 48 cents.

For fiscal 2012, revenue is expected to be in the range of $1.742 billion - $1.750 billion, while other income and expense are expected in the range of $1 - $3 million. GAAP earnings per share are expected around $1.25 - $1.31, while non-GAAP earnings per share are pegged in the range of $2.09 - $2.11.

Conclusion

Synopsys delivered modest third quarter 2012 results, with revenue and operating performance remaining almost unchanged compared to the year-ago period. The improved performance was due to efficient cost management, which increased keeping pace with revenue.

Moreover, with the increasing importance of the automation and IP industries; Synopsys is encouraged to enhance its process of innovations. Synopsys’ financial strength, technology leadership and global support would drive the innovation process.

The fourth 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 have meaningful impact on its result. In addition, we also believe that it will take some time for Synopsys to integrate the chip-design software provider SpringSoft, which will ultimately help the company to come up with innovative solutions.

The company has a short-term Zacks #2 Rank (implying a Buy recommendation).

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