Market Overview

Earnings Analysis: Synopsys

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 we provide 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). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Synopsys Inc.'s analysis versus peers uses the following peer-set: ARM Holdings PLC ADS (ARMH), Autodesk Inc. (ADSK), Ansys Inc. (ANSS), Cadence Design Systems Inc. (CDNS), National Instruments Corp. (NATI) and Mentor Graphics Corp. (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 SNPS-US 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. SNPS-US's net margin is its lowest relative to the last five years and compares to a high of 17.2% in 2010.

Economic Moat

SNPS-US'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. SNPS-US is currently converting every 1% of change in revenue into -1.2% change in annual reported earnings.

SNPS-US'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 SNPS-US's operations do not benefit from any differentiating pricing advantage. In addition, SNPS-US's pre-tax margin of 11.5% is also around the peer median suggesting no operating cost advantage relative to peers.

Growth & Investment Strategy

SNPS-US'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.

SNPS-US'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

SNPS-US'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.

SNPS-US'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

Graph of Revenues Trend for Synopsys Inc. (NASDAQ: <a class=
Graph of Revenues Trend for Synopsys Inc. (NASDAQ: <a class=
Graph of Net Margin Trend for Synopsys Inc. (NASDAQ: <a class=
Graph of Net Margin Trend for Synopsys Inc. (NASDAQ: <a class=
Graph of Accruals Trend (% revenues, Quarterly) for Synopsys Inc. (NASDAQ: <a class=
Graph of Accruals Trend (% revenues, Annual or TTM) for Synopsys Inc. (NASDAQ: <a class=

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. The Core EDA products generally fall into the following suites: the Galaxy Design Platform, which includes tools to design an integrated circuit; the Discovery Verification Platform, which includes tools to verify that an integrated circuit behaves as intended and the FPGA design products, which includes complex chips that can be customized or programmed to perform a specific function after they are manufactured. The company's Intellectual Property products are pre-designed circuits that engineers use as components of larger chip designs rather than redesigning those circuits themselves, which includes broad DesignWare IP portfolio, such as USB, PCI Express, DDR, Ethernet, SATA and HDMI. The System-Level Solutions include Platform Architect for architectural optimization; SPW and System Studio for algorithm design; Processor Designer for custom processor design and Synphony Model and C Compiler for High Level Synthesis. The Manufacturing Solutions include the Technology-CAD device modeling products; Proteus OPC optical proximity correction products; CATS mask data preparation product and Yield Management solutions, including Odyssey and Recipe Manager and Editor and Yield Explorer. The Professional Services and Training includes consulting and design services that address all phases of the SoC development process, such as assist Synopsys customers with new tool and methodology adoption, chip architecture and specification development, functional and low power design and verification, and physical implementation and signoff. Synopsys was founded by Aart J. de Geus on December 1, 1986 and is headquartered in Mountain View, CA.

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