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Synopsys (NASDAQ: SNPS) reported fiscal Q1 2020 earnings which beat analyst estimates but slowing growth in one of the business segments has driven the stock lower after hours.

Sales for the Electronic Design Automation (EDA) firm came in at $834.4 million which beat consensus estimates of $821.3 million.

Analysts had been expecting revenues basically flat (+0.11%) to the same quarter the previous year, however Synopsys managed to grow revenues by 1.7%.

Synopsys posted earnings of $1.01 per share which came in above Wall Street expectations of $0.92 per share.

Our first quarter was a strong start to fiscal year 2020. We delivered financial results at or above our guidance targets and are reaffirming our outlook for the year. Even with caution around global markets, electronics companies continue to invest in critical chip and system designs, as well as substantially increasing amounts of sophisticated software. Synopsys Chairman and co-CEO, Aart de Geus

While the bulk of Synopsys’ sales comes from their EDA Semiconductor and System Design segment (90% of revenues), the company also has a Software Integrity business. That business had been the growth driver for Synopsys last year, growing revenues 19% in 2019 compared to 2018. However, this quarter growth slowed significantly with revenues up only 3.8% compared to the same quarter the previous year. The EDA segment also showed slowing growth with revenues up 1.5% year over year.

While the Software Integrity business unit had been growing revenues, margins in the business are not nearly up to par with the EDA software which is a much more mature market. Synopsys’ Software Integrity segment reported operating margins of just 9.4% compared to operating margins for the EDA segment of 23.9%.

The EDA market is comprised basically of 3 major players: Synopsys, Cadence (NASDAQ: CDNS), and Siemen-owned Mentor (ETR: SIE). As we discovered when we took a closer look at Cadence after their recent earnings report, business has been good for this software segment.

What do you get when 3 big players control a market for 30 years with little innovation or disruption? Well you get those companies printing amazing margins and appreciating PS ratios.

Source: YCharts

Synopsys stock has been on a strong run recently, growing more than 65% over 2019 and adding another 17% in 2020 thus far. In fact, the stock has outperformed that of rival Cadence by more than 10% over the past 12 months. Leading in to the earnings report the stock gained another 1.4% and after releasing earnings Synopsys stock was down 2.5% in after market trading as of the time of publishing.

Full Disclosure: The author owns shares of Cadence.

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Don Weaver

Don has over 15 years of technology, business and start-up experience focusing on software, hardware integration and project management. Don’s research at Grizzle explores the intersection of technology and money. Don holds an MBA from HEC Paris.

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