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Synopsys Healthy Financially and Growing in Security Market

Gabe Moretti, Senior Editor

The recent corporate presentation of its forth quarter and annual results shows a strong Synopsys that continues to grow its annual revenue and expand its markets into non-traditional EDA fields.

The annual revenue is slightly over 2.4 billion for 2016 or roughly $180 million more than 2015. The company spent $81 million in research and development more than the previous fiscal year and almost $1 million less in General and Administrative functions in spite of growing the company involvement in new markets.

Synopsys serves three groups of customers:

  • Semiconductor companies. While consolidation continues, as semiconductor companies drive efficiencies and competitiveness, investments in complex chips and systems remain robust.
  • Systems houses (incorporate chips and software into products/systems). Opportunity space is great, as exciting applications such as digital intelligence, machine learning, smart IoT, 5G mobile networks, virtual and assisted reality, and massive cloud-based computing drive substantial investment and challenges.
  • Software developers in many industries, including financial institutions, industrial, automotive, and medical. Synopsys further expanded its business in the software security testing space with the acquisitions of Cigital and Codiscope this month. Both Synopsys and Cigital have been recognized by Gartner as key vendors in its Magic Quadrant, and together the company will provide the most comprehensive security testing platform in the industry.

What I find to be a negative aspect of Synopsys’ management can be seen in figure 1.  Taking the last five years revenue are constantly growing yet net income and therefore the profit margin percentage have remained quite constant.  This indicates that management efficiency in generating returns for stockholders needs improving.  Yet in the same period the stock price has gone from $26.02 to $58.35 while the company has yet to pay a regular dividend.

Figure 1.  Revenue, Income, and Profit Margin (percentage) for the last five years (Courtesy Synopsys)

What is notable is the fact that the company business model underscores time-based revenue meaning multi-year licenses that make up approximately 90% of total revenue.  What this means is that Synopsys already has about 80% of its 2017 target revenue included in non-cancellable backlog.  The sales force will have to generate the other 20% or $514 million to reach the lowest corporate target for 2017.

Synopsys has just announced that it will repurchase $100 million worth of its shares from Wells Fargo Bank during a period ending no later than February 16, 2017.  The purchase price will be based on Synopsys’ volume-weighted average share price during the repurchase period, less a discount.  I believe that it will result in increasing the company treasury stock by about 2 million shares.  That will still leave 149 million shares on the open market.  Treasury stock is of course used for acquisitions of additional companies, among other uses.

Security Market

Synopsys determined in the last couple of years that software security was a promising market that it was likely to be successful in.  It arrived at that conclusion by studying the electronic industry global value chain.

Figure 2: Global Value Chain: EDA and IP at the center of Accellerating Electronics Innovation

A can be seen from figure 2 the EDA and IP market feeds all the other market segments one of which, Embedded Software, is the new segment chosen by Synopsys as the next market to serve since it clearly already serves the remaining three markets.

The company has increased its presence in the market with the acquisitions of Cigital, a privately held provider of software security managed and professional services, and Codiscope, a 2015 spinoff of Cigital and provider of complementary security tools. Cigital is a large, global application security firm specializing in professional and managed services for identifying, remediating and preventing vulnerabilities in software applications. Codiscope has transformed the tools and intellectual property created by Cigital into a suite of accessible and streamlined products for a broad population of developers.

Before the acquisition the Software Integrity market was served with the following products:

Protecode – software composition analysis, Coverity – static code analysis, Defensics – intelligent fuzz testing, Seeker – runtime security analysis, Test Advisor – automated test optimization and AbuseSA – actionable threat intelligence.

The security of software code throughout the software supply chain is a critical concern for companies across a broad range of industries, from financial services and medical devices to industrial controls and automotive. As the cyber security landscape becomes increasingly complex, many organizations are struggling to determine the right solution in the context of a multitude of point tool offerings and varying vendor strategies, as well as their own IT challenges and priorities. The acquisition of Cigital and Codiscope adds complementary products, services, and a highly skilled workforce to the Synopsys portfolio, enabling Synopsys to offer a comprehensive software security signoff solution.

It will be interesting to see how much this market will contribute to earnings and profitability in the coming years.

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