Here's the Rundown on Synopsis: Ride the Momentum After Blowout Quarter

 | Feb 16, 2017 | 11:00 AM EST
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After a blowout quarter reported last night, can Synopsys (SNPS) keep up the momentum? In the last 12 months, the stock is up more than 50%.

Back in November, I thought the electronic design automation (EDA) software house could keep going. I believed the stock would pass $60. After yesterday's earnings, the shares have now soared in Thursday morning trading to more than $70.

Synopsys reported January-quarter (first-quarter fiscal year 2017) non-GAAP earnings of $0.94, $0.16 better than the consensus estimate. Revenue jumped 15%, year to year, to $652.8 million, versus the $637.7 million estimate.

The company said the upside resulted from the timing of hardware sales and intellectual property consulting. Approximately 90% of revenue came from beginning-of-quarter backlog, and one customer accounted for more than 10% of revenue.

On a non-GAAP basis, the company posted an operating margin of 27%, well above the analyst estimate of 23.2%. Synopsys generated $47 million in operating cash flow, even with a gigantic annual incentive compensation payment to the workforce.

In the quarter, the company bought back $100 million worth of stock, leaving $335 million on its buyback authorization.

If that wasn't enough, management raised fiscal second quarter and full-year guidance. For the second quarter, Synopsis expects revenue to range from $665 million to $680 million and sees non-GAAP earnings between $0.85 and $0.88 per share. Most analysts were at $635 million and $0.74 for the second quarter.

Synopsis also upped the low end of full-year guidance. Previously, it was looking for revenue to grow between 6% and 7%, but management now sees growth of 6.5%-8%. They also hiked the non-GAAP EPS target range by $0.04, to $3.21 to $3.26.

Because of the timing of certain hardware sales, revenue is likely skewed toward the first half of the year, instead of the usual second half. The company warned investors to expect continued quarterly variability in revenue due to the growth of its hardware business and its upfront revenue recognition.

Before the report, the fiscal 2017 EPS estimate was at $3.20 on about 7% revenue growth. Both of those estimates now look a little low. Look for analysts to shift their estimated earnings growth rates about a point higher and boost their price targets.

Given its strong earnings momentum, I expect Synopsys shares to go higher. A company like Synopsis should easily fetch 21-23 times forward earnings estimates. Using $3.26 for fiscal 2017, a valuation at more than $70 is more than justified.

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