Synopsys Earnings: Signs of Strength Against a Tough Environment; Maintaining Fair Value of $382

Narrow-moat Synopsys SNPS reported solid second-quarter results that came in slightly below our revenue expectations, however, they were above our non-GAAP EPS expectations. Despite a tough macroenvironment involving a weaker semiconductor market, management is confident in future wins stemming from the firm’s customers prioritizing research and development in chip design for when demand ramps up again. With this in mind, management raised its full-year guidance, as well as guiding to a sequentially stronger third quarter. Synopsys remains confident in long-term demand as the company capitalizes on the secular push toward hyperscale computing, artificial intelligence, and 5G communications. We expect Synopsys’ solutions to continue to gain broad-based adoption as demand for higher complexity, tighter integration, and security in chips increases across industries. We are maintaining our $382 fair value estimate, and with afterhours shares trading around $384, we view shares as fairly valued.

Second-quarter revenue grew 9% year over year to $1.395 billion, with impressive demand across segments amid choppy macroeconomic conditions. Software integrity was most notably up 17% year over year, reaching revenue of $132 million, and the firm surpassed its target of $500 million in trailing 12-month revenue for the segment. Design automation was up 13% year over year to $928 million, as EDA software and hardware remain a critical component to enable growth for complex technologies. Design IP came in at $335 million, down 4% year over year due to a tough compare against exceptional prior-year results.

Non-GAAP operating margin was 33.3% in the quarter, compared with 36.8% in the prior-year period. Non-GAAP EPS came in at $2.54, compared with FactSet consensus of $2.56. While we see the impacts of a weaker semiconductor market weighing on Synopsys, we remain impressed with the firm’s resilience and expect margins to improve in coming quarters.