SAN FRANCISCO Synopsys Inc.'s stock closed lower for a second consecutive day Friday (Aug. 18), losing 9 cents, or 0.5 percent, to close at $18.02. Since closing at $18.60 on Wednesday, the day the company announced its fiscal third quarter earnings, Synopsys has experienced a modest decline of 58 cents, or a little more than three percent.
Synopsys (Mountain View, Calif.) Wednesday
posted strong fiscal third quarter results, exceeding consensus analyst expectations with revenue of $277.2 million and pro-forma earnings of 21 cents per share.
Afterward, company executives said the fiscal third quarter marked the seventh consecutive quarter in which the EDA giant had "substantially" exceeded its own internal orders target. Crediting stronger-than-expected results for the year-to-date, particularly in the first and second fiscal quarters, Synopsys slightly upped its guidance for the fiscal year, saying it now expects to report revenue of $1.086 billion to $1.094 billion for the year, with pro-forma earnings of 73 to 75 cents per share.
Despite the stronger-then-expected quarter and modestly improved outlook for the fiscal year, at least some analysts remain unenthusiastic about the prospects for the company's short-term stock price, citing weaker-than-expected fiscal fourth quarter guidance, lack of confidence in fiscal third quarter bookings strength and concerns about expenses.
In research notes published Thursday, investment analysts from Merrill Lynch, Deutsche Bank and RBC Capital Markets maintained current ratings and share price targets for Synopsys, citing various concerns for the current quarter.
Jay Vleeschhouwer, Merrill Lynch analyst, said in a note that Synopsys' fiscal third quarter performance was better than his firm had expected, but cited concerns about books during the quarter. Vleeschhouwer said Merrill Lynch inferred that Synopsys' book-to-bill ration for the quarter was likely below parity. He said his firm infers that bookings for the first nine months of the year are running behind bookings for the same period of 2005.
"The net trend is flat, unless one or more of IC Compiler, DFM, and other focus areas yield gross improvements in run-rates," Vleeschhouwer wrote.
If there was a clearer positive trend toward broad improvements in run-rates with customers, "the shares may become more compelling," Vleeschhouwer wrote. "In the meantime, though, we should see some improvements in estimated next-12-month revenue from backlog, operating margins and cash flow."
Merrill Lynch maintained its "neutral" rating on Synopsys, and said it believes Synopsys shares are currently trading at fair value.
Tim Fox, research analyst at Deutsche Bank, maintained a "hold" rating on Synopsys and a $21 price target for the company's shares. Fox cited concern about flat growth for Synopsys' core Galaxy product line. Fox, like his counterparts at Merrill Lynch and RBC, applauded Synopsys progress in improving operating margin through cost cutting.
"We like the margin story here, but need more than just anecdotal evidence that Galaxy bookings are growing," Fox wrote.
The heart of the Galaxy bookings question centers on adoption rates for IC Compiler, Synopsys' next-generation physical design system, rolled out last year as a replacement for the venerable PC-Astro product. Analysts have expressed concern that IC Compiler may not offer an attractive performance improvement over PC-Astro for many Synopsys customers, which could lead to slow adoption. This would be a problem because, as Fox notes, Synopsys' core implementation products account for more than 50 percent of revenues.