Revenue in the third quarter was $336.9 million, down from $345.2 million last year. Revenue was in line with management's guidance range of $330.0 million to $338.0 million. License revenues (including time-based and upfront) were $301.2 million, down from $303.4 million in the year-ago quarter. Maintenance and service revenues were $35.7 million, down from $41.8 million.
During the third quarter, more than 90% of revenues came from backlog created at the beginning of the quarter. Apart from this, the company's upfront revenue constituted 4.0% of the total revenue. During the recent downturn, the company had invested in acquisitions and expansion of the total addressable market, which is gradually generating results, although a meaningful growth has yet to be achieved.
Total gross profit in the third quarter was $270.2 million (80.2% of revenue), down 1.8% from gross profit of $275.1 million (79.7% of revenue) in the year-ago quarter. Gross profit declined as a result of high cost of sales and a decline in revenues. Total operating expense was $219.4 million, up 2.5% from $214.1 million. The year-over-year increase in cost and expense was primarily due to an increase in research and development, as well as a rise in sales and marketing expense. Operating margin was 15.1%, down from 17.7% in the year-ago period.
GAAP net income in the third quarter was $39.3 million, or $0.26 per share, compared to $47.4 million, or $0.32 in the third quarter of fiscal 2009. Including special items like amortization, in-process research and development, acquisition-related costs, facility restructuring charge, and tax benefit from IRS settlement, the non-GAAP net income was $47.8 million, or $0.31 per share, compared with $56.9 million, or $0.39 a year earlier.
Synopsys has a strong cash position. On July 31, cash and short-term investments were $1.21 billion, compared to $1.07 billion at the end of the previous quarter. The company has no long-term debt. Total deferred revenue at the end of the quarter was $593.9 million, compared with $553.9 million reported in the previous quarter. Days Sales Outstanding (DSO) remained flat sequentially at 40 days, reflecting superior quality of the A/R portfolio.
For the fourth quarter of fiscal 2010, the company expects revenues in the range of $349 million–$357 million. Total GAAP expenses are expected to remain in the range of $291 million–$310 million. On a non-GAAP basis, expenses are expected to be in the range of $267 million–$277 million. The company has projected GAAP earnings per share of $0.21 to $0.27 and non-GAAP EPS of $0.37 to $0.39.
For full-year 2010, the company expects revenues between $1.354 billion and $1.362 billion. Other income and expenses are expected to be in the range of $4.0 million–$7.0 million. The company has projected GAAP EPS of $1.61 to $1.67 and non-GAAP EPS of $1.58 to $1.60.
Synopsys delivered decent numbers in the third quarter results, without any improvement in operating performance. The 2010 guidance does not reflect any meaningful growth. Although Synopsys is gaining traction from new products, acquisitions, and new EDA partnerships, we believe these factors will take some time to produce favorable results.
We believe Synopsys' time-based license model has good visibility and the company has a decent cash position. Additionally, the semiconductor industry is stabilizing and demand is expected to strengthen in the near future.
We currently have a long-term "Neutral" recommendation on the stock, with a shorter-term Zacks #3 Rank ("Hold").
Disclosure: No positions