Synopsys, Inc. — Q1 FY2020 10-Q Summary
Business context and period. Synopsys supplies electronic design automation (EDA), semiconductor IP, system-design products and services, and software security and quality tools. The quarter ended January 31, 2020 for presentation purposes; the reported fiscal-quarter results ended February 1, 2020. Comparisons are with Q1 FY2019.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $834.4 million | $820.4 million | Up 1.7% |
| Gross profit / margin | $641.5 million / 76.9% | $627.5 million / 76.5% | Margin up 0.4 percentage points |
| Operating income / margin | $87.5 million / 10.5% | $147.4 million / 18.0% | Income down 40.6% |
| Net income | $104.1 million | $153.5 million | Down 32.2% |
| Diluted EPS | $0.67 | $1.01 | Down 33.7% |
| Cash from operations | $9.8 million | $(144.0) million | Improved $153.8 million |
Cash and cash equivalents were $700.4 million at January 31, 2020, down from $728.6 million at October 31, 2019. Total debt was approximately $331.1 million, comprising $208.6 million short-term and $122.5 million long-term. The company also reported $527.4 million of operating lease liabilities. Working capital was a deficit of $104.3 million, versus a $13.6 million deficit at fiscal year-end.
Changes and management commentary
- Revenue growth was modest and attributed primarily to organic growth. Semiconductor & System Design revenue rose 1% to $748.7 million; Software Integrity revenue rose 4% to $85.6 million.
- Upfront-products revenue increased 15% to $150.7 million, mainly on higher IP sales, partly offset by lower hardware sales. Maintenance and service revenue fell 7% to $127.2 million, including a 28% decline in maintenance revenue.
- Operating expenses rose $73.9 million overall. R&D increased 16% to $314.3 million, principally from personnel and facility costs; G&A increased 63% to $68.7 million. Prior-year G&A included an $18.3 million legal settlement in Synopsys’s favor.
- Net income benefited from a $4.5 million income-tax benefit and $12.5 million of gains on deferred-compensation-plan assets. These gains were substantially above the prior-year $4.3 million and contributed to the increase in other income.
- Operating cash flow improved year over year, but remained low; management cited lower operating disbursements, partly offset by higher annual variable-compensation payouts. Accounts receivable increased $245.2 million from year-end, and the cash-flow statement shows a $246.4 million receivables use of cash.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said cash, expected operating cash generation and available revolver capacity should meet routine needs for at least the next 12 months and the foreseeable future.
- Management highlights revenue variability from contract-renewal timing, IP and hardware sales, customer drawdowns and the revenue-recognition model. It also identifies customer spending, industry consolidation, competition, international trade restrictions and foreign-exchange movements as risks.
- The filing specifically identifies COVID-19 as a potential source of business disruption and risk to international operations; it does not quantify an impact on this quarter.
- Q1 restructuring charges were $8.8 million under a plan expected to total $56–$65 million, with completion anticipated by Q2 FY2020. $25.3 million remained accrued at quarter-end.
- Synopsys spent $80.0 million on share repurchases during the quarter and had $300.0 million remaining under its repurchase authorization. It also entered a $100.0 million accelerated share repurchase agreement; $20.0 million remained to be settled by February 27, 2020.
- A Hungarian tax assessment remains under appeal. The disputed assessment is approximately $25 million plus $11 million in interest and penalties; the company had paid the amounts and recorded them as prepaid taxes. The filing says the Hungarian Supreme Court had not set a hearing date.
Important facts for investors to verify
- Whether subsequent quarters sustain revenue growth and improve operating margins after higher R&D, personnel and restructuring costs.
- Whether receivables convert to cash and operating cash flow strengthens, given the quarter’s low cash generation and working-capital deficit.
- How the $190 million revolver borrowing, other debt, lease obligations and planned repurchases affect liquidity and capital allocation.
- Developments in the Hungarian tax appeal, other tax examinations and the possible resolution of up to $52 million in unrecognized tax benefits noted as reasonably possible to decrease over the next 12 months.
- Any realized business effects from COVID-19, trade restrictions or customer spending changes; the filing does not quantify these potential impacts.