Synopsys (SNPS Quick QuoteSNPS - Free Report) reported third-quarter fiscal 2023 non-GAAP earnings of $2.88 per share, beating the Zacks Consensus Estimate of $2.73. The bottom line improved 37.1% year over year, mainly driven by higher revenues and better cost management.

Revenues jumped 19% year over year to $1.49 billion, driven by growth across its business segments. The top line surpassed the Zacks Consensus Estimate of $1.48 billion by 0.4%.

Synopsys’ top-line results benefited from the increasing demand for its products amid the rapid adoption of generative AI technology. In the automotive segment, advanced driver assistance systems continue to drive the demand for the company’s IP product.

Quarter in Detail

In the license-type revenue group, Time-Based Product revenues (62% of the total revenues) of $922.8 million were up 22.3% year over year. Upfront Product revenues (20%) moved upward by 10.9% to $298 million. Maintenance and Service revenues (18%) increased 18.5% to $266.4 million from the year-ago quarter’s $224.9 million.

Our third-quarter revenue estimates for the Time-Based Product, Upfront Product, and Maintenance and Services categories were pegged at $886.7 million, $340.1 million and $253.9 million, respectively.

Segment-wise, Electronic Design Automation (“EDA”) revenues (65.5% of revenues) were $972.2 million, up 22.2% year over year. Design Intellectual Property (“IP”) revenues (23.5% of revenues) amounted to $350.2 million, while Software Integrity revenues totaled $132.9 million, contributing approximately 8.9% to the top line in the reported quarter. Other revenues were $31.9 million, representing 2.1% of the total revenues.

Our estimates for the EDA, Design IP, Software Integrity and Other segment third-quarter revenues were pegged at $953.1 million, $360.4 million, $141.5 million and $25.7 million, respectively.

Geographically, Synopsys’ revenues in North America (44% of the total) and Europe (10%) were $653.9 million and $145.6 million, respectively. Revenues from Korea (11%), China (20%) and Other (15%) were $163.9 million, $304 million and $219.8 million, respectively.

The non-GAAP operating margin was 35.3%, expanding 390 basis points (bps) year over year.

Software Integrity’s adjusted operating margin expanded 740 bps year over year to 16.9%, while EDA’s adjusted operating margin improved 500 bps to 41.4%. On the contrary, the Design IP margin contracted 200 bps 24.7%.

Balance Sheet & Cash Flow

Synopsys had cash and short-term investments of $1.83 billion as of Jul 31, 2023 compared with $1.70 billion as of Apr 30, 2023.

The total long-term debt was $18.2 million at the end of the reported quarter, slightly down from $20.2 million as of Apr 30, 2023.

The company generated operating cash flow of $560 million in the third quarter and $1.38 billion in the first nine months of fiscal 2023.

Guidance Update

Buoyed by the stronger-than-expected third-quarter performance, Synopsys raised its guidance for fiscal 2023.

For fiscal 2023, SNPS now expects revenues between $5.81 billion and $5.84 billion, up from the earlier guidance range of $5.79-$5.83 billion. Non-GAAP earnings are now estimated in the range of $11.04-$11.09 per share instead of the previous band of $10.77-$10.84 per share.

Non-GAAP expenses are likely to be in the range of $3.78-$3.79 billion, slightly down from the earlier forecast in the band of $3.79-$3.82 billion.

For the fourth quarter of fiscal 2023, Synopsys expects revenues between $1.567 billion and $1.597 billion. Management estimates non-GAAP earnings between $3.01 per share and $3.06 per share. Non-GAAP expenses are anticipated in the band of $1.005-$1.015 billion.

Zacks Rank & Other Stocks to Consider

Currently, Synopsys carries a Zacks Rank #2 (Buy). Shares of SNPS have increased 34.1% year to date (YTD).

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