Ticker Reports for August 24th
Synopsys: Looking to Stay Ahead of Industry Trends after Solid Q3
Synopsys (NASDAQ: SNPS) is a firm in the semiconductor industry that provides key software to chip designers. So far this year, the company has underperformed its industry with a total return of 10%. In contrast, the Invesco PHLX Semiconductor ETF (NASDAQ: SOXQ) has returned over 26%. It tracks the PHLX Semiconductor Index.
Let's dive into Synopsys' business and market presence. Next, we'll examine the company’s fiscal Q3 2024 earnings report from Aug. 21. I'll also shed light on key insights from the firm's earnings call.
Synopsys’ Software Is a Small but Mighty Part of the Chip Industry
Synopsys is a leading supplier of electronic design automation (EDA) software, along with competitors Cadence Design Systems (NASDAQ: CDNS) and Siemens (OTCMKTS: SMAWF). Together, these firms control 75% to 80% of the EDA software market share. The company also provides IP cores.
The company has three segments: Design Automation (EDA), Design IP (IP cores), and Software Integrity. In fiscal 2023, EDA made up 63% of revenues, Design IP made up 26%, and Software Integrity made up 9%. This distribution has remained almost exactly the same since fiscal 2021.
The firm is selling its Software Integrity business. It now reports the segment under "discontinued operations."
Looking at the firm’s place in the semiconductor industry, EDA software and IP cores make up a relatively small percentage of the overall value added at around 2% to 3%. However, even though the percentage of value that EDA software adds is small compared to other players, the products themselves are essential to the advancement of the semiconductor industry.
It is more or less impossible for design firms like NVIDIA (NASDAQ: NVDA) to create advanced chips without EDA software. To help design firms continually make more advanced chips, EDA companies are well known for spending a huge percentage of their revenues on research and development (R&D). In 2023, R&D spending was equal to 33% of total revenues. On the other hand, the number was 14% for NVIDIA.
The EDA market is concentrated, with three players controlling almost all of it. This gives Synopsys a big advantage. This lack of competition allows the firm to have some of the highest margins in the global technology sector. According to Koyfin, the company’s operating margin is higher than 91% of these firms.
Synopsys Delivers Strong Performance in Fiscal Q3 Earnings
Synopsys beat estimates on both earnings and revenue and raised full-year guidance above expectations. Adjusted EPS was $3.43, a surprise of 4% and an increase of 27% from the prior year's quarter. Sales came in $10 million above expectations at $1.53 billion, an increase of 13%.
Synopsys raised its full-year adjusted EPS guidance to a midpoint of $13.10, 1% higher than analysts surveyed by Capital IQ expected. The results caused shares to jump over 3% in after-hours trading, but early trading on Aug. 22 wiped out those gains.
Encouraging Earnings Call Answers Provide a Positive Outlook
One question hovering over Synopsys was how the recent poor performance of Intel (NASDAQ: INTC) would affect the company. Intel is a large Synopsys customer and announced it is laying off 15% of its workforce. This could cause demand for Synopsys’s products to decline as Intel scales back its operations.
Yet, one analyst on the earnings call posed a question with the opposite tone. They believed that these layoffs would mean Intel might have to outsource more of its EDA and Design IP capabilities to firms like Synopsys, which could bolster the firm's sales.
However, CEO Sassine Ghazi says Intel’s transition to using more external software and IP is not new. In short, Ghazi said he doesn’t see any short- or mid-term impact on the company’s revenues, positive or negative, based on the Intel layoffs.
It was also good to hear Ghazi’s response to a question about Advanced Micro Devices (NASDAQ: AMD) recent acquisition of ZT Systems. AMD wants to move to a “systems approach” in its data center offerings to better compete with NVIDIA.
Data centers are extremely important in the industry right now. In its last earnings release, NVIDIA grew its data center revenue by 427%, and analysts expect the firm to bring in $100 billion in data center revenue in fiscal 2025.
Ghazi said these systems' offerings are “exactly the solution and the partnership we are working with our customers on." This strong response is encouraging. It provides confidence that Synopsys is staying ahead of semiconductor industry trends.
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Willams-Sonoma Completes Stock Split: Buy It on the Dip
Williams-Sonoma’s (NYSE: WSM) stock price slumped after its Q2 earnings release, but investors should use this opportunity to load up on a high-quality retail stock. The critical details from the report align with an outlook for steadily rising share prices, and there is a recent stock split to consider. The company completed a two-for-one split in July, cutting its share price in half and increasing accessibility to smaller investors. A stock split does nothing for a company’s fundamental quality, but fundamentally sound businesses that grow tend to split their shares. Historically, companies that split their stock tend to double the S&P 500 (NYSEARCA: SPY) performance over time.
Williams-Sonoma Falls on Mixed Results: Earnings Quality is the Critical Detail
Williams-Sonoma struggled in Q2, producing $1.79 billion in revenue, down nearly 4% compared to last year and missing the analyst consensus. That aside, the remainder of the details are favorable, including the margin of error. Williams-Sonoma missed the consensus by a slim 110 basis point margin, and profitability gains offset the weakness. Segmentally, three of the four operating segments are down compared to last year, but the contraction is slowing. The core Williams-Sonoma brand is down only -0.8% and Pottery Barn Kids produced growth.
The margin news is what counts. Williams-Sonoma’s brand strength and operational improvements allowed full-priced selling while reducing supply chain costs. The net result is a 550 basis point improvement in gross margin and a 160 basis point improvement in operating margin, which left the operating margin at the high end of the long-term target range, just shy of 17%. The takeaway is that adjusted earnings grew by 11.5% despite the top-line contraction and outpaced consensus by 800 bps, and margin strength is expected to persist.
The guidance is mixed, which is part of why the share price slumped following the report. The company lowered its revenue guidance, which is not good news, but it offset the reduction with an improved outlook for earnings. The company expects the operating margin to run above 18%, up 40 bps at the low and high-end range, sufficient to sustain significant cash flow and balance sheet strength.
Williams-Sonoma Builds Value for Investors with Capital Returns
Williams-Sonoma’s operational quality drives robust cash flow. Cash flow approached $250 million for the quarter, about 14%, of which 82% or just over $203 million was returned to shareholders. Capital returns include dividends and share buybacks, which reduce the count over time. The dividend is worth about 1.6%, with shares trading near firm support, and is expected to grow over time. The dividend payout ratio is less than 30% of earnings, leaving ample for increases. The company has increased for 19 years and is on track to continue annual increases indefinitely.
The balance sheet is a primary driver for WSM share prices. The cash flow positive quarter led to a substantial increase in cash, current, and total assets while paying dividends and buying back shares. Cash is up more than 100% compared to last year, with debt and total liabilities flat, driving a 40% increase in equity. Because the equity increase is primarily cash, investors may expect a larger-than-average dividend increase this year or accelerated repurchases.
Analysts Lead Williams-Sonoma to All-Time High
The initial analysts' response to Williams-Sonoma’s Q2 results is favorable. The single update tracked by MarketBeat is a reiterated Hold and $170 price target that aligns with the trends. The trends have this stock pegged firmly at a consensus of Hold by 17 analysts with a price target of $138. The $138 is only a few percentage points above the current price action, but most recent targets are well above it, pointing to a range of $150 to $180 or 12% to 35% within the next two to four quarters.
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Diabetes and Neuro Products Ignite Medtronic's Q1 Earnings Rally
Shares of medical device manufacturer Medtronic PLC (NYSE: MDT) are down about 35% from their highs of roughly three years ago, but promising results from the company's first quarter of fiscal 2025, which ended July 26, could help to drive renewed upward momentum. Specifically, Medtronic's diabetes and neuromodulation products may be poised for breakout growth, and the company's up-and-coming products in various stages of development offer promise as well.
Medtronic Beats Expectations with Strong Q1 Revenue and EPS Growth
Revenue of $7.9 billion for the quarter was up 2.8% as reported and 5.3% organically, ahead of analyst expectations and representing a seventh consecutive quarter of mid-single-digit growth. Non-GAAP diluted EPS of $1.23 was 3 cents above consensus estimates. Top- and bottom-line improvement hinged on strong performance across multiple categories.
Medtronic expects this outperformance to continue as the firm raised the bottom end of its full-year FY2025 guidance for revenue and EPS. Organic revenue growth is now forecast at 4.5% to 5%; prior to this report, it was 4% to 5%. Medtronic now expects non-GAAP EPS to be in the range of $5.42 to $5.50, while before, it was $5.40 to $5.50.
This is a modest but important change to guidance, as the company lifted the bottom end of guidance in both cases despite anticipating a negative impact from foreign currency exchange. The updated guidance reflects Medtronic's optimism about its new product launches and continued adoption of popular existing medical devices.
Medtronic's adjusted gross margin was a solid 65.9% for the quarter, down 50 basis points year-over-year but ahead of expectations. As in the guidance case, currency negatively impacted this figure, although pricing helped drive a gross margin improvement of 30 basis points on a constant currency basis.
Medtronic’s Neuroscience and Diabetes Segments See Impressive Growth
A highlight of Medtronic's fiscal first-quarter performance was the firm's diabetes category, led by its MiniMed 780G automated insulin delivery (AID) system. This business line experienced 12.6% organic revenue growth to $647 million during the quarter.
Following the end of Q1, Medtronic has more recently announced two other updates to its diabetes business that signal the potential for continued growth. First, the company received FDA approval for its Simplera continuous glucose monitor (CGM) system. Medtronic has already experienced success with the full market release of its related Simplera Sync sensor internationally, boding well for the U.S. launch of this new CGM. Medtronic will likely pursue approval of its InPen smart insulin pen system as well, potentially allowing for full integration into a single, easy-to-use system for diabetes patients.
Additionally, Medtronic announced a partnership with Abbott Laboratories (NYSE: ABT) to develop an integrated CGM. The company expects this will increase its installed base and further boost diabetes business revenue.
Neuromodulation, part of Medtronic's neuroscience portfolio, also drove its first-quarter results. The portfolio's revenue grew organically by 5.3% to $2.3 billion. Neuromodulation, in particular, grew by 10%, surpassing the market. The brain modulation business, driven by the launch of the neurostimulation machine Percept RC for use with patients experiencing neurological disorders like Parkinson's, grew by an impressive 14%.
MDT's New Product Pipeline Offers Potential
Besides the success of the product launches above, Medtronic offers a deep and varied pipeline of other medical devices at various stages of development. An especially important one to watch is the Sphere9 catheter for use in atrial fibrillation treatment.
Medtronic already maintains a solid position in this space thanks to its PulseSelect catheter line. Since launch, PulseSelect catheters have treated more than 10,000 patients and accelerated Medtronic's cardiac ablation solutions growth to 6% year-over-year. The company expects PulseSelect to continue to drive further improvement in the current quarter and beyond.
The Sphere9 product, which is being launched in limited quantities in Europe and is pending FDA approval in the U.S., could help Medtronic capture an even larger portion of the $9-billion cardiac ablation market.
Increases in Acute Care Needs Could Benefit Medtronic
Acute care — short-term emergency services such as trauma care and surgery — has boomed in part due to an aging population. Medtronic and its competitors, such as fellow medical and surgical equipment manufacturer Stryker Co. (NYSE: SYK), stand to benefit from increased utilization of their products. Given Medtronic's broad range of business lines and deep pipeline, it remains a healthcare stock to watch.
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