Synopsis Inc (SNPS)- Q1’25 Red Flags
The quality of Q1’25’s growth looked suspect to us
We first mentioned SNPS last year in our April 2024 piece highlighting technology companies whose results were showing signs of aggressive revenue recognition (Tech Revenue Warnings). Since that time, the company has reported multiple disappointing quarters causing the stock price to fall as much as 30% below our report price since publication. However, investors appeared to be encouraged by Q1’25 results.
Note that SNPS is near the closing date of its ANSYS acquisition, which is expected to close in Q2. This will create some “noise” in the financial statements for the rest of the year. However, we saw several signs of concern in Q1 results that could lead to problems after the merger.
First, the Q1 EPS forecast looked lowballed to us. SNPS barely topped revenue guidance and did not have costs come in below forecasts. Guidance going into the quarter was $2.77-$2.82 which the company beat by 24 cents. The only positive variable was net interest income was $19 million above forecast which was worth 10 cents and there was a 2-cent headwind from higher bad debt expense.
We also have continuing concerns with revenue recognition in recent quarters and also see some benefits to recent earnings that may reverse after the ANSYS deal: