Synopsys, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Fiscal quarter and six months ended April 30, 2020; comparisons are with the corresponding 2019 periods. Synopsys provides electronic design automation (EDA), semiconductor IP, system design and software security and quality products and services.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $861.3M | $836.2M | $1,695.7M | $1,656.6M |
| Gross margin dollars | $677.1M | $645.6M | $1,318.6M | $1,273.1M |
| Operating income | $125.9M | $115.5M | $213.4M | $262.9M |
| Net income | $109.9M | $118.2M | $214.0M | $271.7M |
| Diluted EPS | $0.71 | $0.77 | $1.39 | $1.77 |
- Q2 revenue grew 3%; management attributed the increase mainly to organic growth. Time-based product revenue rose 6% to $590.1M, while upfront product revenue fell 9% to $129.8M, largely reflecting hardware shipment timing. Maintenance and service revenue rose 5% to $141.5M.
- Q2 gross margin was approximately 78.6% of revenue, versus 77.2% a year earlier. Operating margin was approximately 14.6%, versus 13.8%; net margin was approximately 12.8%, versus 14.1%.
- Q2 operating income increased 9%, but net income fell 7% and diluted EPS fell 8%. A $34.7M year-over-year adverse swing in gains and losses on executive deferred-compensation plan assets weighed on other income.
- For the first six months, revenue increased 2%, while operating income declined 19% and net income declined 21%. The prior-year comparison included an $18.3M legal settlement in Synopsys’ favor in Q1 FY2019. The FY2020 period also included $38.4M of restructuring charges, versus $14.4M for the comparable six months.
- Q2 Semiconductor & System Design revenue was $773.1M, up 3%; Software Integrity revenue was $88.3M, up 6%. Segment adjusted operating margins were 27% and 13%, respectively. These are segment-adjusted measures, not consolidated GAAP margins.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $389.7M, compared with $208.8M in 2019. Management attributed the improvement primarily to higher deferred revenue from contract and invoicing timing and lower operating disbursements.
- Six-month investing cash outflow was $236.7M, including $151.2M of acquisition and intangible-asset payments and $80.7M of capital expenditures. Financing cash outflow was $20.7M, including $180.0M of share repurchases.
- At April 30, cash and cash equivalents were $856.4M, up from $728.6M at October 31, 2019. Current assets were $2.0B and current liabilities $2.1B, resulting in a $93.4M working-capital deficit, versus a $13.6M deficit at fiscal year-end. Deferred revenue increased to $1.52B.
- Reported short- and long-term debt totaled approximately $235.8M, versus $137.7M at October 31, 2019. This included $100.0M drawn on the revolving facility, $111.4M outstanding under the term loan (net of issuance costs), and $24.4M under a China credit agreement. The $650M revolver matures November 2021; Synopsys reported compliance with financial covenants.
- The balance sheet included $534.6M of operating lease liabilities. Management said cash, operating cash flow and available revolver capacity should meet routine needs for at least 12 months and the foreseeable future.
Changes, outlook and risks
- Management reported limited COVID-19 effects on results and liquidity to date, but substantial uncertainty about future impacts. It cited slower customer commitments in Software Integrity and minor hardware supply-chain disruptions, while reporting no observed change in customer design activity. Because much license revenue is recognized over multiyear arrangements, potential pandemic effects could be delayed.
- The filing provides no specific FY2020 revenue or earnings guidance. Management stated that current liquidity sources were expected to meet routine business requirements and said it could defer some expenditures as the pandemic evolves.
- Contracted remaining performance obligations were approximately $4.7B, including $652.6M of non-cancellable customer Flexible Spending Account commitments; about 57% was expected to be recognized in the next 12 months. These commitments are not equivalent to guaranteed near-term revenue.
- Risk factors include economic and semiconductor-industry uncertainty, customer concentration and consolidation, competition, upfront hardware/IP revenue variability, hardware supply dependence, and trade restrictions. One customer and its subsidiaries accounted for more than 10% of revenue in both the current and comparative periods. The filing says U.S. Entity List restrictions prevent new business with certain entities; the impact of further restrictions announced in May 2020 was unclear.
- Synopsys’ Hungarian tax appeal remained unresolved after a COVID-related postponement of the Supreme Court hearing. Separately, the company settled Hungarian tax matters for fiscal 2014–2018 in Q2 FY2020 and recognized $6.9M in previously unrecognized tax benefits. The filing estimates a possible $0–$62M decrease in unrecognized tax benefits over the coming 12 months, subject to uncertain settlements and timing.
Important facts for investors to verify
- Whether COVID-19, trade restrictions or slower Software Integrity commitments affect bookings, collections, hardware supply, or revenue in subsequent quarters.
- The drivers of the six-month declines in operating income, net income and diluted EPS, including restructuring, deferred-compensation valuation changes and the prior-year settlement comparison.
- The quality and timing of the $4.7B remaining performance obligations, particularly customer FSA drawdowns and expected revenue recognition.
- Working-capital trends, deferred revenue, debt levels, revolver usage and covenant compliance as share repurchases, acquisitions and capital spending continue.
- Developments in the Hungarian tax appeal and other tax examinations; the filing reports that the appeal hearing date had not been rescheduled as of April 30, 2020.