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Synopsys (SNPS) Up 12.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Synopsys (SNPS - Free Report) . Shares have added about 12.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Synopsys due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Synopsys Q2 Earnings and Revenues Surpass Estimates

Synopsys second-quarter fiscal 2020 non-GAAP earnings of $1.22 per share beat the Zacks Consensus Estimate by 23.2%. Moreover, the figure improved 5.2% year over year.

Further, revenues increased 3% year over year to $861.3 million and surpassed the Zacks Consensus Estimate by 2.9%.

Growth in work-from-home and e-learning trends induced by the coronavirus pandemic is driving demand for bandwidth, which drove the company’s fiscal second-quarter performance. Moreover, strong traction for Synopsys’ Fusion Compiler product boosted the top line.

However, supply-chain disruptions stemming from the pandemic are a headwind.

Quarter in Detail

Time-Based Product revenues (68.5% of total revenues) of $590.1 million were up 5.7% year over year. Moreover, Maintenance and Service revenues (15.2%) improved 5.2% to $141.5 million. However, Upfront Product revenues (15.1%) declined 9.5% to $129.8 million.

Segment wise, Semiconductor & System Design revenues (89.7% of total) were $773 million, up 2.7% year over year. The upside was driven by strong growth in IP. Within the same, EDA revenues (59% of revenues) were $511.4 million and IP & Systems Integration revenues (30% of revenues) were $260 million.

Software Integrity revenues were 88.3 million, contributing approximately 10% to the top line in the reported quarter.

Geographically, Synopsys’ revenues in North America (47% of total) were $405.8 million, while that in Europe (10%) was $89.3 million. Revenues from Japan (9%), Korea (12%) and the Asia Pacific (21%) were $80.5 million, $105.3 million and $180.4 million, respectively.

Non-GAAP operating margin was 25.7%, expanding 60 basis points (bps) year over year. Semiconductor & System Design delivered an adjusted operating margin of 27.9%, up 30 bps year over year, while Software Integrity margin expanded 320 bps year over year to 13.3%.

Balance Sheet & Cash Flow

Synopsys had cash and cash equivalents of $856.4 million as of Apr 30, compared with $700.4 million as of Jan 31.

Total debt came in at $235.8 million in the reported quarter compared with $331.1 million in the previous quarter.

Operating cash flow for the quarter was $9.8 million, flat on a sequential basis.

Guidance

For third-quarter fiscal 2020, the company’s revenues are expected to be $875-$905 million. The Zacks Consensus Estimate for revenues is currently pegged at $931.8 million, which indicates growth of 9.3% from the year-ago quarter’s reported figure.

Management expects non-GAAP earnings between $1.33 and $1.38 per share. The consensus mark for earnings is pegged at $1.42 cents, which suggests year-over-year growth of 20.3%.

Non-GAAP expenses are anticipated to be $640-$650 million.

For fiscal 2020, revenues are now projected in the range of $3.60-$3.65 billion. The Zacks Consensus Estimate for fiscal 2020 is pegged at $3.62 billion, which indicates year-over-year growth of 7.6%.

 Non-GAAP earnings for the period are expected between $5.21 and $5.28 per share. The consensus mark for 2020 earnings is pegged at $5.21, which suggests growth of 14.3% from the year-ago quarter’s figure.

Synopsys still expects operating-margin expansion of 2 percentage points for the fiscal year.

For fiscal 2020, operating cash flow is expected between $815 million and $840 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -11.74% due to these changes.

VGM Scores

Currently, Synopsys has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Synopsys has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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