What You Need To Know About Synopsys' Q3 Earnings Report

An under-the-radar software stock, Synopsys (SNPS 0.49%) does silicon design and handles the software that goes with it for quality control. The company has been a steady grower and turned a solid third-quarter earnings report at the beginning of December.

In this episode of "Beat and Raise," recorded on Dec. 1, Fool contributors Zane Fracek and Brian Withers break down the details and discuss what makes the company unique.

Brian Withers: We're going to do Synopsys, not to be confused with the stock you did yesterday, Synaptics. [laughs]

Zane Fracek: They're not making it easy for me. To add on to that, they just reported earnings. I was able to pull this slide together real quick for you.

Withers: Awesome.

Fracek: Synopsys, a company I had no idea about, is down about 1.5 percent aftermarket after the earnings despite delivering a pretty decent quarter in my mind. But before that, they've outperformed the S&P 500 pretty handsomely. They've had a pretty solid quarter. But think into the business a little bit. What they do is they're a silicon company, but they're also a software company. They work with silicon design and verification. The lithography needed to make the chips and the verification being the software that actually makes sure that the chips are ready to go. It's like the quality control, and that is surprisingly a very time consuming process. You need to make sure that every chip on every way is ready to go. They work with that. They provide their software, they provide consulting services.

Through that, they've actually become the world's 15th largest software company. That's what they claim. I thought that was a pretty neat stat. They also have a really robust set of intellectual property dealing with silicon, dealing with chips and chip design. They will basically license that out or be able to offer that as part of their consulting services, and that's a big part of their business. They also work with software integrity as well, trying to boost the trust in customer software, limit data breaches and work on the cybersecurity end of it as well, although that's a smaller part of the business. They're offering pre-designed circuits as well, that's part of the chip design. Just electronic systems. It's a very all encompassing company and that's what I've been dealing with here.

But they had a solid quarter with Q4 revenue just in line with expectations, I should say, but 12.5 percent over last year's numbers. This is also exactly in line with what they expected at the end of Q3 this year. Management was able to forecast this quarter pretty darn well. Their earnings came in at $1.28 per share. This is up just two cents from last year, but it does beat analysts' expectations. Their outlook, they set at four and three-quarters of a billion dollars for the full year next year. This is the first time that we get to look into their expectations for all of next year. This goes through the first 10 or 11 months of the quarter because they're on a slightly off schedule with earnings. But some of the highlights, they acquired Concerto, which is not material, it's a smaller acquisition, but this is a software company. This is pretty vague, I know, dealing with AI powered performance optimization software, but what they're doing with this is trying to add to their silicon max offering. This is a newer service type offering maintaining and servicing the silicon in devices over their lifetime. Just adding to their service business, so hopefully they can find some synergies there. Then BISTel, another small acquisition. They just got part of this business. We're dealing with the flat panel display solutions, trying to build up their business there.

My favorite highlight of the quarter, this is a couple of months ago now, but they announced the $175 million share buyback. If you're familiar with buybacks and what that means for the company and for management, generally, that's management trying to say, hey, we're a little bit undervalued. I don't really think they had a ton of cash. I think they thought that this is a great opportunity to buy some stock, to send that message. I'll touch on that cash position a little bit later as well. Some of the concerns from the quarter, as I said, the stock's dropping a little bit after hours, that could be because of these three reasons. They missed. They did not miss. I don't know why I have they missed. There might be something else. They don't have a lot of cash through 2022. They're sitting on, at the end of the year, $1.5 billion in cash, but they're forecasting GAAP expenses between $3.7 and $3.8 billion. Even when you add in the cash flow that they should have of about $1.5 billion, they're cutting it pretty close there and they might not be able to meet their expenses for next year. That's just something to look look at. Maybe they need to raise capital through debt or equity. That's why the stock buyback surprise me a little bit.

On top of that, the CFO is saying goodbye in 2022. Trac Pham is the CFO of Synopsys and he is going to be retiring. He's had a great stretch with Synopsys. I think they're going to be sad to see him go and they're going to start looking for replacement. But this is a company with a solid track record under Trac Pham, beating 100 percent of their earnings estimates for the past two years. They've been on top of analysts' expectations. Looking forward into 2022, their management team is really confident. They raised their long-term financial objectives for both their IP portfolio and their EDA, which is electronic design automation. They're seeing a lot of strength there and they are looking to expand their margin and have double-digit earnings in revenue growth for the foreseeable future. That was Synopsys.

Withers: This is a really interesting company. I'm looking, it's a $54 billion market cap and about four billion in revenue. It's certainly playing into the tailwinds of continued growth in AI and use of chips and just about everything. [laughs] I think my toaster, if it doesn't already, probably has a chip.

Fracek: Synaptics, Synopsys, they're everywhere and I had no idea. [laughs] I'm a little bit smarter for having covered them and now they're on my radar.

Withers: They are actually a recommendation that not only in the Backstage Service. Synopsys was a recommendation in Stock Advisor back in 2019.