Synopsys, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Fiscal quarter ended April 30, 2019; six-month comparison to the six months ended April 30, 2018. Synopsys provides electronic design automation and semiconductor IP, systems validation products and services, and software security and quality solutions.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $836.2 million | $776.8 million | $1,656.6 million | $1,546.3 million |
| Operating income | $115.5 million | $127.0 million | $262.9 million | $234.7 million |
| Net income | $118.2 million | $102.5 million | $271.7 million | $98.8 million |
| Diluted EPS | $0.77 | $0.67 | $1.77 | $0.64 |
| Operating cash flow | Not separately stated | Not separately stated | $208.8 million | $4.3 million |
- Q2 revenue grew 8% year over year; Semiconductor & System Design revenue increased 6% to $753.1 million, and Software Integrity revenue increased 23% to $83.2 million. For the six months, segment revenues grew 5% and 26%, respectively.
- Q2 gross margin was approximately 77.2% of revenue, versus 77.0% a year earlier. Operating margin declined to approximately 13.8% from 16.3%, as operating costs increased faster than revenue. Management cited higher employee-related costs and a $12.3 million increase in restructuring charges.
- Six-month investing cash outflow was $66.3 million, compared with $679.8 million, primarily reflecting $643.5 million of acquisition spending in the prior-year period. Financing used $237.6 million, versus $192.4 million provided in the prior year, reflecting debt repayments and share repurchases.
- Cash and cash equivalents were $631.2 million at April 30, 2019, down from $723.1 million at October 31, 2018. Total debt was approximately $291.8 million: $165.7 million short-term and $126.2 million long-term. The company reported an $89.0 million working-capital deficit, improved from $558.6 million.
Material changes and comparability
- Revenue grew despite the accounting transition to ASC 606, adopted at the start of FY2019 using the modified retrospective method. It changed the timing and classification of some revenue and commission expense, but management said it did not affect cash generation or business operations. Under ASC 606, Q2 revenue was $16.3 million lower than the comparable ASC 605 presentation and net income was $11.8 million lower; six-month revenue was $6.0 million higher and net income $16.1 million higher than the ASC 605 presentation.
- FY2018’s first six months included an extra week, which management estimated added about $46 million of revenue and $34 million of expenses. This, along with ASC 606, limits direct period comparisons.
- Q2 net income included $18.4 million of other income, including a $16.2 million gain on executive deferred-compensation plan assets; the prior-year quarter had a $7.7 million other expense. The six-month effective tax rate was 3.3%, versus 58.7% in FY2018, largely reflecting the prior-year Tax Act impact and current-period tax items.
- The company reorganized reporting into Semiconductor & System Design and Software Integrity segments. Software Integrity’s adjusted operating margin improved to 10% for Q2 from negative 8% a year earlier; Semiconductor & System Design’s was 27%, down from 28%.
Outlook, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the supplied filing text. Management expects approximately 80%–85% of non-hardware revenue to be time-based or recognized over time, and believes cash, operating cash generation and available revolver capacity will meet routine needs for at least the next 12 months.
- FY2019 restructuring charges are expected to total $35 million–$65 million, primarily severance and voluntary retirement benefits, with completion anticipated by Q2 FY2020. Approximately $14.7 million was incurred in the first six months.
- A Hungarian court ruled against the company’s subsidiary in a tax dispute on April 30, 2019; the opinion was received May 16. The company recorded $17.4 million of tax expense and was evaluating whether to appeal. The disputed assessment was approximately $25 million plus $11 million of interest and penalties; amounts had previously been paid and recorded as prepaid taxes.
- In May 2019, U.S. government Entity List restrictions prevented new business with certain entities and placed related revenue on hold until contract expiry or the restrictions are lifted. Management also identifies customer concentration, semiconductor industry demand and consolidation, competition, cyber threats, international trade restrictions, foreign exchange, and tax uncertainty as risks.
- A prior patent settlement with Mentor included a possible one-time termination charge of up to $25 million under certain conditions; the filing reported no change in its status as of April 30, 2019. The company was in compliance with its credit-facility covenants.
Important facts for investors to verify
- Assess reported growth and margins using the ASC 605 comparison and the prior-year extra week, as well as reported ASC 606 results.
- Track whether restructuring costs remain within the estimated $35 million–$65 million range and whether the voluntary retirement program affects staffing or execution.
- Monitor the Hungarian tax appeal decision, any audit developments, and the potential tax or cash consequences.
- Verify the duration and revenue impact of Entity List restrictions, and watch for broader trade measures affecting customers or suppliers.
- Review cash generation, revolver borrowing and debt repayments alongside repurchases; confirm the potential Mentor termination charge and other contingencies.