Synopsys (NASDAQ:SNPS), a software provider to the semiconductor industry, reported its fiscal year 2019 third-quarter results on Wednesday.

Synopsys reported sales growth of 9.4%, which was higher than management's guidance and represents a sequential acceleration. Operating leverage allowed net income to grow at a much faster rate than revenue. Management raised its full-year guidance in response to another strong quarter.

Synopsys' third-quarter results: The raw numbers

Metric

Q3 2019

Q3 2018

Change

Revenue

$853 million

$779 million

9.4%

GAAP net income

$100 million

$79.4 million

27%

GAAP earnings per share

$0.65

$0.52

25%

Data source: Synopsys. GAAP = generally accepted accounting principles.

What happened with Synopsys this quarter?

  • Semiconductor and system design revenue -- which includes sales of electronic design automation (EDA) tools, intellectual property (IP) products, system integration products, and services -- grew 6% to $769 million. Management stated that IP sales were strong but they were offset by a decline in EDA hardware sales.  
  • Software integrity revenue -- which includes products that test for security vulnerabilities and quality defects -- rose 4% to $83.6 million.
  • Consolidated revenue of $853 million exceeded the high end of management's guidance range.
  • GAAP EPS of $0.65 was below the midpoint of management's guidance range of $0.60 to $0.83.
  • On a non-GAAP basis, net income grew 25% to $182.5 million, or $1.18 per share. That result exceeded the high end of management's guidance by $0.06.
  • Management repurchased $100 million during the quarter. That brings its total buybacks to the year to $229 million. However, the diluted share count still went up by more than 1% year over year. 
  • Cash balance was $687 million at quarter's end. Total debt dropped to $142 million.
Computer programmer typing while looking at the camera

Image source: Getty Images.

What management had to say

Co-CEO Aart de Geus called Synopsys' quarterly results "excellent," especially when considering the macro environment. He said, "Despite the uncertain geopolitical and economic backdrop, global design activity and customer engagements are thriving. Our product platforms are the strongest they've ever been, driving technology wins and competitive displacements." 

Check out Synopsys' latest earnings call.

Looking ahead

Management also expects the company's business momentum to continue into the upcoming quarter.

Metric Q4 2019 Guidance Range Q4 2018 Actual Change at Midpoint
Revenue $830 million to $860 million $795 million 6.3%
GAAP EPS $0.69 to $0.82 $1.66 (55%)
Non-GAAP EPS $1.10 to $1.15 $0.78 44%

Data source: Synopsys.

It's important to note that the fourth quarter of fiscal 2018 featured a significant tax restructuring gain that had a positive impact on GAAP profitability but did not boost non-GAAP profits. This explains why GAAP EPS is expected to fall significantly while non-GAAP EPS is predicted to jump. 

Commenting on the full year, Geus said, "As a result of Q3 overachievement and broad-based strength, we're raising guidance for the fiscal year." 

Metric Update Guidance Range Old Guidance Range
Revenue $3.34 billion to $3.37 billion $3.29 billion to $3.35 billion
GAAP EPS $3.11 to $3.24 $2.85 to $3.27
Non-GAAP EPS $4.52 to $4.57 $4.24 to $4.40

Data source: Synopsys.

CFO Trac Pham ended stated on the conference call with investors that the business remains well positioned to deliver against its long-term financial targets:

We continue to execute very well both financially and operationally. We are significantly exceeding our beginning of the year objectives with high-single digit revenue growth, substantial operating margin expansion, and solid double-digit EPS growth. And we continue to return a large portion of our free cash flow to shareholders in the form of buybacks. With the power of our portfolio and business model, we are confident in our ability to deliver sustainable long-term shareholder value.