Why Is Synopsys (SNPS) Down 6.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Synopsys (SNPS). Shares have lost about 6.2% in that time frame, underperforming the S&P 500.

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

Synopsys’ third-quarter fiscal 2020 non-GAAP earnings of $1.74 per share beat the Zacks Consensus Estimate by 28.9%. Moreover, the figure improved 47.5% year over year.

Further, revenues increased 13% year over year to $964.1 million and surpassed the Zacks Consensus Estimate by 7.9% as well.

The company is benefiting from increasing global design activity and customer engagements. The rising trend of machine learning, AI, 5G, IoT, Cloud, and the proliferation of Smart Everything are boosting demand for its advanced solutions.

Quarter in Detail

Time-Based Product revenues (63.5% of total revenues) of $612.1 million were up 13.9% year over year. Maintenance and Service revenues (14.6%) improved 2.4% to $141.1 million. Upfront Product revenues (21.9%) grew 18.8% to $210.9 million.

Segment wise, Semiconductor & System Design revenues (90.3% of total revenues) were $870.7 million, up 13.2% year over year. Within the same, EDA revenues (55% of revenues) were $531.8 million and IP & Systems Integration revenues (35% of revenues) came in at $335.7 million. Software Integrity revenues totaled $93.4 million, contributing approximately 10% to the top line in the reported quarter.

Geographically, Synopsys’ revenues in North America (46% of total) were $443.7 million, and $94.3 million in Europe (10%). Revenues from Japan (8%), Korea (10%) and the Asia Pacific (26%) came in at $77.8 million, $96.3 million and $251.9 million, respectively.

Non-GAAP operating margin was 33.6%, expanding 820 basis points (bps) year over year. Semiconductor & System Design delivered an adjusted operating margin of 35.4%, up 840 bps year over year, while Software Integrity margin expanded 530 bps year over year to 15.8%.

Balance Sheet & Cash Flow

Synopsys had cash and cash equivalents of $1.05 billion as of Jul 31 compared with $856.4 million as of Apr 30.

Total debt came in at $131.4 million in the reported quarter compared with the previous quarter’s $235.8 million.

Operating cash flow in the first nine months of fiscal 2020 was $789.2 million.

Guidance

For fourth-quarter fiscal 2020, the company’s revenues are expected to be $1-$1.03billion. The Zacks Consensus Estimate for revenues is currently pegged at $1.04 billion, which indicates growth of 22% from the year-ago quarter.

Management expects non-GAAP earnings between $1.51 and $1.56 per share. The consensus mark for earnings is pegged at $1.70 cents, suggesting year-over-year growth of 47.8%.

Non-GAAP expenses are anticipated to be $717-$727 million.

For fiscal 2020, management projects revenues at $3.66-$3.69 billion, up from the previous forecast of $3.60-$3.65 billion. The Zacks Consensus Estimate for fiscal 2020 revenues is pinned at $3.63 billion, calling for year-over-year growth of 7.9%.

Non-GAAP earnings for the fiscal year are now expected between $5.48 and $5.53 per share, up from the prior guided range of $5.21-$5.28. The consensus mark for fiscal 2020 earnings is pegged at $5.27, which suggests growth of 15.6% from the year-earlier quarter.

For fiscal 2020, operating cash flow is expected to be approximately $900 million, higher than the previous estimates of $815-$840 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -15.19% due to these changes.

VGM Scores

Currently, Synopsys has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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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