Synopsys, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Fiscal quarter ended January 31, 2017 (the fiscal quarter ended January 28; statements use the closest calendar month-end). Comparisons are with the three months ended January 30, 2016, unless otherwise noted. Amounts are in U.S. dollars.
Business context
Synopsys provides electronic design automation software, semiconductor intellectual property, hardware, technical services, and software quality and security tools. Management said approximately 90% of annual revenue is expected to come from time-based products and maintenance and service; 88% of Q1 revenue was time-based. The company operates as one reportable segment.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $652.8 million | $568.6 million | +15% |
| Gross profit / margin | $497.0 million / 76.1% | $439.2 million / 77.3% | Margin down 1.2 percentage points |
| Operating income / margin | $96.9 million / 14.8% | $71.1 million / 12.5% | Income +36% |
| Net income | $86.6 million | $60.0 million | +44% |
| Diluted EPS | $0.56 | $0.39 | +$0.17 |
| Operating cash flow | $46.9 million | $(35.2) million | Improved $82.1 million |
Revenue gains were attributed mainly to higher hardware sales, time-based license revenue from prior-period bookings, and IP consulting projects, with a smaller contribution from acquisitions. Upfront products revenue rose 83% to $79.6 million, primarily on hardware sales; maintenance and service revenue rose 38% to $83.8 million, largely reflecting consulting-project timing and acquisitions. Time-based products revenue increased 5% to $489.4 million.
Total costs and operating expenses increased 12% to $555.9 million. Higher headcount and hardware and consulting costs were partly offset by lower intangible amortization. Restructuring charges were $12.1 million, versus $2.1 million a year earlier. Other income was $11.5 million, compared with expense of $6.8 million, mainly reflecting a swing in deferred-compensation-plan asset gains and losses. The effective tax rate was 20.1%, up from 6.7%; the prior-year period benefited from the retroactive reinstatement of the federal research tax credit.
Cash, debt and liquidity
Cash, cash equivalents and short-term investments were $966.4 million at January 31, 2017, down $150.9 million from October 31, 2016. Operating cash flow was $46.9 million; investing cash outflow was $202.8 million, including $187.6 million for acquisitions and intangible assets. Financing cash inflow was $15.9 million, including term-loan proceeds, partly offset by debt repayment and share repurchases. Purchases of property and equipment were $18.2 million.
Debt outstanding was approximately $319.5 million: $170.0 million under the revolving facility and $149.5 million under the term loan. The amended credit agreement provides a $650 million revolver, maturing November 2021, and a $150 million term loan. Borrowings have floating rates; at quarter-end the stated rates were LIBOR plus 1.000% on the revolver and 1.125% on the term loan. Synopsys reported compliance with financial covenants. Working capital was $27.4 million, versus $2.0 million at October 31, 2016. Management said available cash, operating cash flow and revolver capacity should meet routine requirements for at least 12 months.
Approximately 84% of cash, cash equivalents and short-term investments were held by foreign subsidiaries; repatriation could incur U.S. taxes. The company repurchased $80 million of shares during the quarter and had $335.5 million remaining under its repurchase authorization.
Outlook, risks and unusual items
- Management described the business outlook as solid and expects time-based products plus maintenance and service to remain approximately 90% of annual revenue. The filing provides no specific numerical earnings or revenue guidance.
- A new reorganization plan is expected to cost $15–$16 million, mainly severance and benefits; $12.1 million was recorded in Q1 and the remainder was expected in Q2, with payments anticipated during FY2017.
- Fiscal Q1 acquisitions had aggregate consideration of $188.1 million, net of cash acquired. Preliminary allocations included $132.9 million of goodwill and $64.9 million of identifiable intangible assets; estimates remained subject to revision.
- The Hungarian tax authority proposed approximately $46 million in tax assessments for fiscal 2011–2013, plus approximately $19 million in potential interest and penalties. Synopsys disputed the assessments and said it intended to contest them. The company reported $104.3 million of gross unrecognized tax benefits.
- Patent litigation with Mentor Graphics included a jury verdict of approximately $36 million and an injunction concerning certain ZeBu product features; appeals remained pending. The filing also reports that the PTO granted a reexamination petition on February 10, 2017.
- Key disclosed risks include semiconductor-industry and customer-spending cycles, dependence on large customers, competitive and product-development pressures, acquisition integration, hardware supply and margin variability, foreign-exchange exposure, cybersecurity, and tax and litigation outcomes. The company had one customer representing more than 10% of revenue.
Most important facts for investors to verify
- Whether revenue growth and operating-income improvement persist, especially given hardware and consulting timing and the decline in gross margin.
- Whether cash generation can fund acquisitions, repurchases and debt service while most liquidity remains outside the United States.
- Progress and final costs of the restructuring and integration of recent acquisitions.
- Developments in the Hungarian tax dispute and Mentor litigation, including potential financial exposure and injunction effects.
- Customer concentration, renewal trends and the sustainability of management’s expected time-based revenue mix.