Earnings Analysis: Synopsys

| About: Synopsys, Inc. (SNPS)

Synopsys Inc. (NASDAQ:SNPS) reports preliminary financial results for the year ended 2012-10-31.

Synopsys Inc. recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise).

Synopsys Inc.'s analysis versus peers uses the following peer-set: ARM Holdings PLC ADS (NASDAQ:ARMH), Autodesk Inc. (NASDAQ:ADSK), Ansys Inc. (NASDAQ:ANSS), Cadence Design Systems Inc. (NASDAQ:CDNS), National Instruments Corp. (NASDAQ:NATI) and Mentor Graphics Corp. (NASDAQ:MENT). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2012-10-31 2011-10-31 2010-10-31 2009-10-31 2008-10-31
Revenues 1,756.0 1,535.6 1,380.7 1,354.7 1,337.0
Revenue Growth % 14.4 11.2 1.9 1.3 10.3
Net Income 182.4 221.4 237.1 167.7 190.0
Net Income Growth % (17.6) (6.6) 41.4 (11.7) 45.6
Net Margin % 10.4 14.4 17.2 12.4 14.2
ROE % 7.9 10.5 12.0 9.9 12.8
ROA % 4.9 6.7 7.6 5.9 7.1

Valuation Drivers

Synopsys Inc.'s current Price/Book of 1.9 is about median in its peer group. The market expects Synopsys Inc. to grow earnings about as fast as the median of its chosen peers (PE of 26.5 compared to peer median of 32.3) but not to expect much improvement in its below peer median rates of return (ROE of 7.9% compared to the peer median ROE of 12.7%).

The company employs relatively high amounts of assets (with a turnover of 0.5x compared to peer median of 0.7x) while generating profit margins of 10.4% that are only about median among its chosen peers. Synopsys Inc.'s net margin is its lowest relative to the last five years and compares to a high of 17.2% in 2010.

Economic Moat

Synopsys Inc.'s revenues have changed in-line with its peers (year-on-year change in revenues is 14.4%) but its earnings have lagged (annual reported earnings have changed by -17.6% compared to the peer median of 18.0%), implying that the company has less control over its costs relative to its peers. Synopsys Inc. is currently converting every 1% of change in revenue into -1.2% change in annual reported earnings.

Synopsys Inc.'s return on assets is now less than its peer median (4.9% vs. peer median 7.9%) in contrast to its returns over the past five years which were around the peer median (6.4% vs. peer median 7.0%). Recent performance suggests that the company's historical competitive advantage is slipping away.

The company's gross margin of 85.6% is around peer median suggesting that Synopsys Inc.'s operations do not benefit from any differentiating pricing advantage. In addition, Synopsys Inc.'s pre-tax margin of 11.5% is also around the peer median suggesting no operating cost advantage relative to peers.

Growth & Investment Strategy

Synopsys Inc.'s revenues have grown at about the same rate as its peers (9.0% vs. 8.7% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 26.5. The historical performance and long-term growth expectations for the company are largely in sync.

Synopsys Inc.'s annualized rate of change in capital of 12.7% over the past three years is around its peer median of 11.4%. This median investment has likewise generated a peer median return on capital of 10.1% averaged over the same three years. This median return on investment implies that company is investing appropriately.

Earnings Quality

Synopsys Inc.'s net income margin for the last twelve months is around the peer median (10.4% vs. peer median of 10.8%). This average margin and relatively conservative accrual policy (17.3% vs. peer median of 11.3%) suggests possible understatement of its reported net income.

Synopsys Inc.'s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

Synopsys, Inc. provides technology solutions used to develop electronics and electronic systems. The company supplies the electronic design automation software that engineers use to design, create prototypes for and test integrated circuits, also known as chips. It also supplies software and hardware used to develop the systems that incorporate integrated circuits and the software that runs on those integrated circuits. The company's products and services are organized into four groups: Core EDA, Intellectual Property and System-Level Solutions, Manufacturing Solutions and Professional Services. Synopsys was founded by Aart J. de Geus on December 1, 1986 and is headquartered in Mountain View, CA.


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