Synopsys Earnings: Momentum Continues As Broad-Based Demand Leads to Strong Results

Narrow-moat Synopsys SNPS reported strong fiscal third-quarter results, with revenue meeting our above-consensus expectations and adjusted EPS surpassing both our and management’s expectations. We are also impressed with the company’s position in artificial intelligence, or AI. We are raising our fair value estimate to $420 per share from $382, but with shares trading up to $438 after hours, we still view the stock as slightly overvalued.

Additionally, Synopsys announced the promotion of Sassine Ghazi, current president and COO, to the CEO role in January 2024, as founder and longtime CEO Aart de Geus will move into an executive chairman role. We view the change as an orderly transition that does not affect our ratings on Synopsys.

Synopsys’ prowess in artificial intelligence continues to be a focus as management presented a three-pronged approach for monetizing AI. Primarily, it will benefit from design participation in AI-optimized semiconductors, such as its expanded partnership with Intel. Additionally, it will embed AI across its entire EDA stack called Synopsys.ai, which is similar to how we foresee many software firms infusing AI into their products. Lastly, the company plans to use AI internally to improve efficiencies, again similar to how many companies may deploy AI in the future.

Third-quarter revenue grew 19% year over year to $1.487 billion, led by 22% year-over-year growth for its largest product group, EDA. Spurring this growth was increased customer share and deeper collaborations with Samsung and Intel. Macroeconomic pressures weighed on its software integrity segment, as it grew 12% year over year, and management now expects this segment’s growth in fiscal 2023 to come in below its long-term target of 15%-20%. Design IP grew 12% to $350 million, although operating margins contracted sequentially for the second straight quarter as design IP contracts can lead to lumpiness in the near term.