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 its most recent earnings report in order to get a better handle on the important catalysts.

Synopsys Q3 Earnings Beat Estimates, Revenues Rise Y/Y

Synopsys reported better-than-expected earnings for the third quarter of fiscal 2024. The company’s fiscal third-quarter non-GAAP earnings per share (EPS) of $3.43 surpassed the Zacks Consensus Estimate of $3.28. The bottom line improved 27% year over year, primarily driven by higher revenues and better cost management.

Revenues jumped 13% year over year to $1.53 billion and came in line with the Zacks Consensus Estimate. The top line was driven by growth across multiple business segments.

Synopsys' revenue growth was driven by ongoing investments from semiconductor and systems companies in its solutions to enhance its R&D capabilities.

Synopsys revealed that it has presented the Software Integrity business as a discontinued operation in its consolidated financial statements for all periods due to its ongoing divestment. Notably, the company has agreed to sell its Software Integrity business to Clearlake Capital and Francisco Partners in a deal worth $2.1 billion.

Quarter in Detail

In the license-type revenue group, Time-Based Product revenues (52.6% of the total revenues) of $803.1 million were down by 2.9% year over year. Upfront Product revenues (29%) moved upward by 51.2% to $442.5 million. Maintenance and Service revenues (18.4%) increased 19.5% to $280.1 million from the year-ago quarter’s $234.3 million.

Segment-wise, Electronic Design Automation (“EDA”) revenues (66.9% of revenues) were $1.02 billion, up 4.9% year over year. Design IP revenues (30.4% of revenues) amounted to $463.1 million. Other revenues were $42.5 million, representing 2.7% of the total revenues.

Geographically, Synopsys’ revenues in North America (44% of the total) and Europe (9%) were $672.6 million and $144.6 million, respectively. Revenues from Korea (13%), China (17%) and other (16%) were $194.8 million, $266.7 million and $247 million, respectively.

The non-GAAP operating margin was 40%, expanding 360 basis points (bps) year over year.

Synopsys’ EDA’s adjusted operating margin rose 70 bps to 41.5%. The Design IP segment’s margin showed a massive improvement to 36.7% from 23.6% in the year-ago quarter.

Balance Sheet & Cash Flow

Synopsys had cash and short-term investments of $1.99 billion as of Jul 31, 2024, compared with $1.66 billion as of Apr 30, 2024.

The total long-term debt was $15.6 million at the end of the reported quarter, which decreased from $17 million reported in the previous quarter.

The company’s cash flow from operating activities, including discontinued operations, was $844.2 million in the first nine months compared with the year-ago quarter’s cash flow of $1.37 billion.

Guidance Update

For fiscal 2024, SNPS expects revenues between $6.105 billion and $6.135 billion compared with the previously announced guidance of $6.09-$6.15 billion. Non-GAAP earnings are expected in the range of $13.07-$13.12 compared with the previous guidance of $12.9-$12.98. Non-GAAP expenses are now expected in the range of $3.76-$3.77 billion compared with the previously projected range of $3.77-$3.81 billion.

For the fourth quarter of fiscal 2024, Synopsys expects revenues between $1.614 billion and $1.644 billion. Management estimates non-GAAP EPS between $3.27 and $3.32. Non-GAAP expenses are anticipated in the band of $1.027-$1.037 billion.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

The consensus estimate has shifted -5.87% due to these changes.

VGM Scores

Currently, Synopsys has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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