After surviving crisis, Synopsys (SNPS) looks to tap unfolding opportunities

In a rare display of resilience, Synopsys, Inc. (NASDAQ: SNPS) managed to continue its operations uninterrupted at a time when the business world is facing an unprecedented crisis. The company’s core product, software for designing chips, is an integral part of the technology that facilitates remote working.

Shares of the Mountain View, California-based company climbed to an all-time high this week as their recovery from the Covid-induced selloff got a boost from the positive second-quarter results. The trend is expected to continue in the future, given the importance of chip-designing in the various aspects of information technology, ranging from personal computers to advanced cloud networks. No wonder market watchers overwhelmingly recommend buying the stock.

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Moreover, enterprises across the tech sector would want to stay up-to-date with their IT products when the market gets back on track, for which they need to invest in core technologies like those offered by Synopsys. Also, the ongoing transition from 7-nanometer to 5-nanometer processors generates additional demand.

Order Growth

The huge backlog that runs into several million dollars is indicative of the steady uptick in orders – from a range of clients including mobile networking companies and microprocessor manufactures. The favorable response to products launched last year seems to have catalyzed order growth, especially for the main Electronic Design Automation segment.

“We have to execute now in the next few quarters. We’ll see what the global economy does. I think that semiconductors are actually in a good spot relatively speaking to most other markets and we have not seen a slowdown.”

Aart de Geus, co-CEO of Synopsys

Meanwhile, unlike the other areas of the business, the Software Integrity division faces the risk of a slowdown, with clients deferring their procurement decisions due to the changing operating environment. But this segment is likely to get prominence in the coming months when the remote work culture gains further ground.

Market Share

Synopsys executives hope that the continuing innovation that resulted in the rollout of several new products and concepts like fusion design would help the company maintain competitive wins and retain customers. However, retaining market share in China can be challenging for the company, especially after the introduction of Entity List amidst the trade-related headwinds and growing competition.

When it comes to profitability, the current initiatives to streamline operations should add to margin growth. Interestingly, the management looks to fine-tune investments in the promising areas of the business through the ongoing organizational restructuring, with focus on cost-reduction.

Strong Q2 

Adjusted earnings moved up 5% annually to $1.22 per share in the second quarter. There was a modest increase in revenues to $861.3 million that reflects the strong order growth, especially for digital design software. Executives at Synopsys seem unfazed by the Covid-related uncertainties and reaffirmed the full-year revenue outlook, while issuing positive guidance for the current quarter.

Buoyed by the uptrend in recurring revenue, which accounts for about 90% of the total, the management has set the ambitious goal of achieving $0.5-1 billion in revenues this year.

Responding to a question at the earnings conference call, on the impact of the pandemic on Q2 revenues, Synopsys’ CFO Trac Pham said, “COVID had a really small effect on the results — were immaterial effect on the financial results. As we mentioned, we had a — some initial challenges with the supply chain when the shelter-in-place mandates went into effect, but we were able to overcome that and execute on the numbers for the quarter. Good execution in Q2, results were strong and it’s on, but we did see some revenues move in from Q3 to Q2.”

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The company’s stock was trading at an all-time high when coronavirus battered the market two months ago. After falling from the peak, the stock bounced back in March and hit a new high. The rally continued after the earnings release. The stock has gained 42% in the past twelve months.