Synopsys, Inc. — Q3 FY2013 Form 10-Q
Business context and reporting period
Synopsys supplies electronic design automation software, semiconductor intellectual property, hardware and related services. This unaudited quarterly report covers the fiscal quarter ended July 31, 2013, and the nine months then ended. The comparable nine-month 2012 period included an extra week, which added approximately $26 million of revenue and $16 million of expense.
Financial performance and liquidity
Amounts are in millions, except per-share data. Comparisons are year over year; balance-sheet comparisons are against October 31, 2012.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $482.9 | $443.7 | $1,457.3 | $1,301.8 |
| Gross margin | 76.1% | 77.5% | 77.1% | 77.7% |
| Operating income | $55.0 | $63.4 | $195.5 | $150.5 |
| Operating margin | 11.4% | 14.3% | 13.4% | 11.6% |
| Net income | $52.3 | $75.7 | $190.9 | $153.3 |
| Diluted EPS | $0.33 | $0.50 | $1.22 | $1.03 |
| Net cash from operating activities | Not provided separately | Not provided separately | $305.4 | $383.1 |
- Quarterly revenue rose 9%; time-based license revenue increased 7% to $387.1 million, upfront license revenue rose 57% to $40.0 million, and maintenance and service revenue was nearly flat at $55.9 million.
- Quarterly operating expenses and cost of revenue increased 13% in total. Higher acquisition-related employee costs and amortization contributed to expense growth; R&D rose 16% to $166.7 million.
- Cash and cash equivalents were $892.4 million, up $192.0 million from fiscal year-end. Current assets were $1,330.1 million and current liabilities $1,171.7 million, yielding working capital of $158.4 million, versus a deficit of $111.9 million at fiscal year-end.
- Debt totaled $112.5 million: $30.0 million short term and $82.5 million long term. No amount was drawn on the $350 million revolving facility. The term loan bears variable interest tied to LIBOR and is due by October 2016.
- For the first nine months, investing activities used $48.1 million, including $47.6 million for property and equipment; financing activities used $52.2 million. Cash increased by $192.0 million overall.
Material changes versus comparable periods
- Quarterly net income fell 31%, while revenue increased 9%. Management attributed the earnings decline primarily to prior-year IRS and Taiwan tax settlements that benefited Q3 2012, along with higher operating costs.
- Quarterly gross and operating margins declined, reflecting increased cost of revenue and operating expenses, including acquisition-related costs and amortization. Nine-month operating income increased despite the additional week in the prior-year comparison.
- Nine-month operating cash flow declined 20%, primarily due to lower deferred revenue and higher disbursements, partly offset by lower tax payments and higher customer collections; management described these effects as timing-related.
- Intangible assets, net, declined to $364.0 million from $466.3 million, while nine-month intangible amortization increased to $99.4 million from $73.7 million, principally due to prior-year acquisitions.
- Synopsys acquired the remaining 8.4% non-controlling interest in SpringSoft for $44.0 million in cash. It repurchased $70.0 million of shares during the nine months; $202.4 million remained available under the repurchase authorization.
Outlook, commentary, risks and contingencies
- Management described its business outlook as strong, citing recurring revenue, technology, customer relationships, expense management, acquisition strategy and demand for mobile devices. More than 90% of revenue was described as recurring, and approximately 90% of quarterly revenue is typically committed before the quarter begins. The filing gives no numeric earnings or revenue guidance.
- Management said prior acquisitions expanded the product portfolio and addressable market, but warned that integration, retention, product performance and realization of expected growth or synergies remain uncertain.
- Approximately $509.0 million of cash was held in foreign subsidiaries and considered indefinitely reinvested. Repatriating funds to the U.S. could require additional U.S. taxes if not previously accrued.
- Gross unrecognized tax benefits were $100.8 million, excluding interest and penalties. The company said a decrease of $0 to $23 million was reasonably possible over the coming 12 months, but timing and settlement amounts were uncertain.
- Material patent disputes include Dynetix claims concerning VCS technology and multiple Mentor Graphics matters involving acquired EVE products and other patents. The filing notes that litigation outcomes are uncertain and that damages, injunctions, defense costs or business disruption could result.
- Key disclosed risks include semiconductor-industry and customer spending weakness, customer concentration and consolidation, competition, acquisition integration, international and foreign-exchange exposure, tax examinations, intellectual-property claims, product defects, cybersecurity and catastrophic events. One customer represented 11.5% of Q3 revenue.
- Management reported disclosure controls were effective at providing reasonable assurance as of July 31, 2013, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and the recurring-license base remain durable, particularly given customer spending conditions and the 11.5% customer concentration.
- Whether expense growth, acquisition-related amortization and integration costs continue to pressure quarterly margins and earnings.
- Whether operating cash flow recovers as deferred-revenue and payment timing normalize, and how much cash is practically available in the U.S. after potential repatriation taxes.
- The resolution and potential financial impact of the disclosed tax audits and patent litigation, including the Dynetix and Mentor Graphics cases.
- Actual performance against management’s qualitative positive outlook; the filing provides no numeric forward guidance.