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Synopsys Inc. (SNPS - Analyst Report) reported earnings per share (EPS) of 55 cents in the first quarter of 2013, well ahead of the Zacks Consensus Estimate of 28 cents.

Revenue

Revenue in the first quarter stood at $475.1 million, up 11.7% from $425.5 million in the year-ago period. The company witnessed good business volume, technology progress, and customer engagements during the first quarter. Moreover, Semiconductor companies are adopting new technology at regular intervals.

License revenues (including time-based and upfront) were $385.9 million, up 8.4% from $355.9 million in the year-ago quarter. Upfront revenue was 6.5% of the total revenue and well within the company’s targeted range of less than 10.0%.

Maintenance and service revenues were $58.4 million, up 42.1% from $41.1 million in the prior-year quarter.

Operating Results                    

Gross profit was $364.0 million (76.6% of the total revenue), up 8.5% from $335.6 million (78.9% of revenues) in the year-ago quarter. Gross margin declined, as growth in cost exceeded the growth in revenue.

Total operating expense in the quarter was $303.1 million, up 14.1% from $265.6 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 12.8% versus 16.4% in the year-ago quarter.

GAAP net income in the reported quarter was $69.9 million or 45 cents per share, up from $56.7 million or 39 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 55 cents per share, below 61 cents in the year-ago quarter.

Balance Sheet

As of Jan 31, 2013, cash and cash equivalents were $500.4 million compared with $700.4 million at the end of the previous quarter. Accounts receivable was $270.2 million, down from $292.7 million in the year-ago quarter.

Guidance

For the second quarter of fiscal 2013, the company expects revenue in the range of $490–$500 million. The company expects GAAP expenses in the range of $409–$425 million. While GAAP earnings per share are expected in the range of 38–44 cents, Non-GAAP earnings per share are expected in the range of 63–65 cents.

For the full year 2013, the company expects revenue in the range of $1.955–$1.975 billion, while GAAP earnings per share are expected in the range of $1.44–$1.56 and non-GAAP earnings per share are projected to be $2.35–$2.40.

Conclusion

Synopsys delivered modest first-quarter 2013 results, with a substantial jump in revenue but operating margin declining compared with the year-ago quarter.

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’ product innovation strategy, the popularity of its time-based license model and its tie up with Advanced Micro Devices Inc. (AMD - Analyst Report) encourage us.

However, stiff competition from Adobe Systems (ADBE - Analyst Report), Advent Software (ADVS - Snapshot Report), all of which carry a Zacks Rank #1 (Strong Buy), 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 #4 (Sell).

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