Synopsys Confident of Broad-Based Demand Fueling Growth

Narrow-moat Synopsys SNPS reported solid first-quarter results that came in above management’s and our at-consensus expectations for revenue and adjusted EPS. Despite a choppy macroenvironment involving reduced semiconductor industry growth and a looming recession, management reaffirmed its full-year guidance and increased its adjusted EPS target range. Synopsys remains confident of long-term demand from end markets as it continues to benefit from secular tailwinds toward hyperscale computing, artificial intelligence, and 5G communications. We expect Synopsys’ solutions to continue to gain broad-based significance as demand for higher complexity, and tighter integration and security in chips perpetuates throughout industries. We are maintaining our $382 fair value estimate, and with shares trading around $365 after hours, we view the stock as fairly valued.

First-quarter revenue grew 7% year over year to $1.36 billion, with broad-based demand across all solutions. In the quarter, Synopsys reported results under its new business segments, which the firm believes better reflects the evolving state of its offerings. New segments include design automation, design IP, and software integrity, which represent 65%, 25%, and 10% of total revenue, respectively. All segments performed well, with design automation and design IP reaching revenue of $890 million and $344 million, respectively, as electronic design automation tools remain a critical component to enable growth for sophisticated technologies.

Non-GAAP operating margin was 35.2% in the quarter, down 100 basis points from the prior-year period. Non-GAAP EPS came in at $2.62, compared with FactSet consensus of $2.50. We are impressed by Synopsys’ ability to deliver results against a backdrop of macroeconomic uncertainty and expect margins to continually improve this financial year.