Synopsys Better Than the Rest

In continuation with the my EDA industry review of Magma (LAVA) on Monday, here is the Q2 analysis for Synopsys’ (SNPS) results that were announced last month.

Synopsys, the second major player in the EDA industry announced revenues of $324.6 million. The company exceeded the market’s expectations of $321.3 million and recorded an impressive 11% growth over the year. Its EPS also grew by 17% to reach $0.41, which is much higher than the market’s expectations of $0.38.

Up front revenue contributed 4% to the total revenue and the balance 96% was backlog revenue.

Going forward, the company expects Q3 revenue to be $335-$343 million with EPS of $0.38 - $0.40. For the year, revenue is expected to grow by 9.5%-10.5% to be $1325 - $1340 million with EPS of $1.60 - $1.64.

During the quarter, the company repurchased 3.8 million shares of stock worth $87 million.

While the rest of the industry has been facing economic pressures, the Synopsys management continues to be optimistic about the economy. They feel that the demand for electronics is continuing to grow. Also, the growing pressure is pushing the industry into innovations to help get a bigger market share. [Yes, but see my analysis below on design starts, which is cause for woes for Synopsys.]

During the quarter, the company did its share of innovating. It has made progress in the use of multi-core multi-thread computation which it claims will result in substantial speed-ups, such as a 2x performance boost using dual cores. The company launched Eclypse, a comprehensive suite of low power system level verification technology.

However, its biggest move for the quarter was the acquisition of Synplicity for a cash transaction of $181 million. The acquisition is expected to generate $20 million in revenue for the year with EPS of $0.02 - $0.03. Synplicity is a strong technology leader in FPGA designs and hardware-based rapid prototyping.

The FPGA market is rapidly adopting the most advanced design nodes. Adding Synopsys’ IP position and verification tools to FPGAs will also make the market all the more attractive. In addition, Synplicity has built a very interesting rapid prototyping verification business which aids interaction between hardware and software which would help improve productivity and predictability.

The stock reacted positively to the results and after having slipped a couple of cents is now trading at $26.35 levels, which is 7% higher than before announcement of the results.

The problem lies not so much with Synopsys as with the industry and the overall market. In fact, of the lot in EDA, Synopsys seems to be executing the best.

EDA’s growth is based on Design Starts, and not the volume of IC shipped. While the IC shipped number has been growing at gangbuster rates with the surge in consumer electronics in particular, and the permeation of electronics into pretty much all aspects of our lives in general, design starts have not really grown at a comparable speed. In fact, the irony is that IC and system vendors are trying hard to make fewer designs become hit products, thereby controlling the cost of IC design that has sky-rocketed.

I have written much earlier about the EDA industry and its woes. (Read: Future of EDA, Addendum) and the growing concerns with Synopsys’ chief rival Cadence (Read: Cadence Crashes, Now What? all of which point to the lack of leadership in the EDA industry.

I maintain that until the value erosion concerns are sorted, none of these companies – despite their good results is worth investing in. The only sign of a company trying to address the value erosion issue that I have seen so far is from a small company called BlazeDFM, that is tackling parametric yield loss due to power.

Disclosure: None