Strong quarterly reports have become common-place for SNPS -- hence, its surging stock price -- as it hasn't missed on either the top or bottom line since 4Q14. However, this report is especially strong, marked by wide top and bottom line beats, solid improvement in margins, and strong cash flow generation. As we discuss in more detail below, the "Smart Everything" trend, along with the need for smaller and more efficient chips, are the primary, broad catalysts that are driving SNPS' results.
First, before discussing the results in more detail, here's some background information on SNPS. The company develops both hardware and software that are used to design and test integrated circuits, or, ICs. The products, software, and machinery it provides are complex. In simple terms, its products help semiconductor OEMs derive the most efficiency and power out of the chips they produce, while also enabling them to reduce form factors. Also, semiconductor OEMs use its products and software for testing that help them reduce the risk of defects and vulnerabilities in production.
As for its Q4 report, SNPS reported EPS of $0.69, beating consensus by $0.12, with revenue up 10% year/year to $696.6 million, also easily ahead of the $650.7 million expectation. In addition to the strong headline numbers, a few of SNPS' key operating metrics also were solid. For instance, operating margin increased to 23.8% for the year, despite the dilutive Cigital and Codiscope acquisitions, it generated $185 million in cash flow during the quarter, and its three year backlog grew by about $150 million to $3.7 billion.
In addition to the upside Q4 results, SNPS also issued upside guidance for both 1Q18 and FY18. Specifically, it guided for Q1 EPS of $0.98-$1.02 vs. the $0.84 consensus, with revenue of $740-$765 million vs. the $673.5 million consensus. And for FY18, it guided for EPS of $3.58-$3.65 (excluding recent Black Duck acquisition) vs. the $3.57 consensus on revenue of $2.82-$2.86 billion compared to the $2.82 billion expectation.
During its conference call last night, SNPS commented on how the age of "Smart Everything", or, Digital Intelligence, is a driving force behind its strength. This wave is seen in the growth of Internet of Things, in automotive, virtual reality, and medical devices. Management believes that it is well-positioned to capitalize, due to it being at the intersection of silicon hardware and software. Its design and verification tools are a necessity for next-generation advanced chips and systems. Also, with ever-increasing chip sophistication and complexity, the success of next-generation chips is key in bringing about big data and machine-learning opportunities.
In terms of the specific areas where the company is seeing the most robust growth, management singled out applications in mobile, automotive, CPUs, graphics, and AI-specific processors. Automotive has been particularly strong as it has secured wins with nine of the top ten automotive IC suppliers. Looking ahead, the company sees automotive as a particular area of strength as the auto industry requires certification of components throughout, due to the importance of safety.
While demand is expected to remain firm, SNPS also plans to continue buying back its stock. It re-purchased $400 million this year and it has $400 million remaining on its current authorization.