Synopsys, Inc. — Q2 FY2013 Form 10-Q
Business context and reporting period. Synopsys supplies electronic design automation software, semiconductor IP, hardware and related services. This filing covers the quarter presented as ended April 30, 2013, and the six months ended April 30, 2013. Fiscal 2013 is a 52-week year; the comparable first half of fiscal 2012 included an extra week, adding approximately $26 million of revenue and $16 million of expenses.
Financial performance
| Metric | Three months ended April 30, 2013 | Three months ended April 30, 2012 | Six months ended April 30, 2013 | Six months ended April 30, 2012 |
|---|---|---|---|---|
| Revenue | $499.3 million | $432.6 million | $974.4 million | $858.1 million |
| Gross margin | $391.5 million; 78.4% | $332.1 million; 76.8% | $755.6 million; 77.5% | $667.7 million; 77.8% |
| Operating income | $79.5 million; 15.9% | $17.1 million; 4.0% | $140.5 million; 14.4% | $87.1 million; 10.2% |
| Net income | $68.7 million | $21.0 million | $138.6 million | $77.7 million |
| Diluted EPS | $0.44 | $0.14 | $0.89 | $0.52 |
- Revenue mix: Time-based license revenue was $413.5 million for the quarter, up 14% year over year and 83% of revenue. Maintenance and service revenue rose 31% to $61.0 million; upfront license revenue rose 11% to $24.8 million.
- Cash flow: First-half operating cash flow was $42.3 million, down from $87.5 million. Investing used $29.0 million and financing used $21.0 million. Cash and cash equivalents ended at $681.0 million, versus $700.4 million at October 31, 2012.
- Liquidity and debt: Current assets were $1.106 billion and current liabilities $1.013 billion, producing working capital of $93.5 million versus a deficit of $111.9 million at fiscal year-end. Debt totaled $120.0 million: $30.0 million current and $90.0 million long-term. The $350 million revolver had no outstanding balance.
Material changes versus comparable periods
- Quarterly revenue increased 15%, primarily from organic growth and acquired businesses; quarterly net income rose 227%. Management said total operating expenses and cost of revenue were relatively flat, with lower prior-year acquisition costs offsetting higher employee-related costs and acquisition-related amortization.
- For the first half, revenue increased 14% as reported; excluding the prior-year extra week, management said revenue was higher by $142.3 million. Operating income increased while first-half cash from operations declined, primarily due to lower deferred revenue and higher disbursements, partly offset by customer collections.
- Research and development expense rose 12% for the quarter, while sales and marketing fell 5% and general and administrative expense fell 35%, largely reflecting lower acquisition-related costs and expense allocations.
- Accounts receivable declined to $251.7 million from $292.7 million; days sales outstanding fell to 46 from 59. Deferred revenue also declined, including a $143.0 million reduction in current deferred revenue, primarily due to billing timing.
Outlook, risks and unusual items
- Management described its business outlook as strong, citing recurring revenue, expense management, customer relationships and acquisitions. More than 90% of revenue is generally recurring, and the company typically enters a quarter with more than 90% of that quarter’s revenue committed. The filing provides no specific numerical guidance for future revenue or earnings.
- Management cautioned that semiconductor and electronics demand, customer R&D spending, contract renewals and payment timing can affect results. Other stated risks include competitive and technological change, acquisition integration and returns, foreign currency exposure, customer concentration and international operations.
- Approximately 60.8% of cash was held by foreign subsidiaries and considered indefinitely reinvested; repatriation could result in additional U.S. taxes if not previously accrued. The company reported $105.5 million in gross unrecognized tax benefits; up to $21 million of underlying benefits could potentially decrease in the coming 12 months, although timing and settlement outcomes are uncertain.
- Pending patent disputes include Dynetix litigation and several Mentor Graphics cases involving acquired EVE products. The Dynetix court had granted partial summary judgment for Synopsys on certain claims; other claims remained for trial. Litigation outcomes are uncertain.
- During the first quarter, Synopsys paid $44.0 million to acquire SpringSoft’s remaining 8.4% non-controlling interest. It repurchased $35.0 million of shares in the first half; $237.4 million remained available under the repurchase authorization.
Important facts for investors to verify
- Whether revenue and operating income growth are sustained, and how acquired businesses contribute to growth and costs.
- Whether deferred-revenue movements and the decline in operating cash flow reflect timing or a continuing change in cash conversion.
- The effect of the shorter fiscal 2013 first half versus fiscal 2012’s extra week when comparing year-over-year results.
- Cash availability in the United States, potential tax costs of repatriation, and scheduled term-loan repayments.
- Developments in the Dynetix and Mentor disputes, tax examinations and uncertain tax positions.
- Customer concentration: one customer generated 11.6% of quarterly revenue and 11.4% of first-half revenue in 2013.