Synopsys, Inc. — FY2010 Form 10-K
Business context and period. Synopsys supplies electronic design automation software, semiconductor intellectual property, system-level and manufacturing tools, and related services. This annual report covers the fiscal year ended October 30, 2010 (presented as October 31); it is not a standalone fourth-quarter filing. Fiscal 2010 was a 52-week year.
Key financial results
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $1,380.7 million | $1,360.0 million | +2% |
| Gross margin dollars | $1,099.6 million | $1,086.4 million | +1% |
| Gross margin rate | 79.6% | 79.9% | Down 0.3 percentage points |
| Operating income | $184.1 million | $208.3 million | Down 12% |
| Operating margin | 13.3% | 15.3% | Down 2.0 percentage points |
| Net income | $237.1 million | $167.7 million | +41% |
| Diluted EPS | $1.56 | $1.15 | +36% |
| Cash from operations | $341.0 million | $239.2 million | +43% |
- Net income included a $94.3 million one-time tax benefit from an IRS settlement. The company reported a $38.4 million income tax benefit, versus $65.4 million of tax expense in FY2009; the increase in net income therefore did not reflect comparable operating growth.
- Revenue mix: time-based licenses $1,158.4 million (84% of revenue), upfront licenses $68.6 million (5%), and maintenance and services $153.6 million (11%). Approximately 95% of revenue was time-based licenses, maintenance, and services.
- Research and development expense was $449.2 million, up 7%; total operating expenses were $915.5 million, up 4%. Higher acquisition-related costs and headcount contributed to expense growth.
- At year-end, cash and cash equivalents were $775.4 million and short-term investments were $163.2 million, totaling $938.6 million, down 20% from $1,168.3 million. Working capital was $326.0 million, down from $649.2 million.
- Total assets were $3.29 billion and stockholders’ equity was $2.10 billion. No borrowings were outstanding under the $300 million revolving credit facility; the facility was due to terminate October 20, 2011. The filing reports no significant off-balance-sheet arrangements.
Changes versus the prior year
- Revenue rose modestly, with increases in upfront license revenue (+19%) and time-based license revenue (+1%); maintenance revenue fell 8%, partly offset by higher professional services revenue.
- Operating income declined despite higher revenue, as operating expenses grew faster. Operating margin fell to 13.3% from 15.3%.
- Operating cash flow increased to $341.0 million. Investing cash use was $238.7 million, including $500.8 million paid for acquisitions, net of cash acquired; financing used $43.1 million, including $184.7 million of share repurchases and $145.3 million of stock issuance proceeds.
- Goodwill increased to $1.27 billion from $932.7 million and net intangible assets to $249.7 million from $96.8 million, largely reflecting acquisitions. The company completed eight acquisitions during FY2010, including Virage Logic.
- Backlog rose 9% to approximately $2.4 billion from $2.2 billion. Management attributed the increase primarily to contract-renewal timing and acquired backlog, and cautioned that backlog may not predict future revenue.
Outlook, commentary, and risks
- Management described the outlook as positive based on its financial position, expense management, customer relationships, and acquisition strategy, while remaining cautious about the strength and sustainability of the economic recovery. No quantified FY2011 revenue or earnings guidance is provided in the supplied filing text.
- Management said recurring revenue generally exceeds 90% and that more than 90% of a quarter’s revenue is typically committed at the start of that quarter. Revenue recognition and cash collection depend on license mix, payment terms, renewals, and customer creditworthiness.
- Key risks include semiconductor-sector spending and design activity, macroeconomic uncertainty, intense competition and industry consolidation, customer payment defaults, acquisition integration and potential impairment, intellectual-property claims, foreign exchange exposure, and changes in tax laws or audit outcomes.
- The company is defending customers against a patent-infringement claim involving a Japanese electronics company; management considers the claim without merit, but the potential impact could not be estimated. The filing also identifies routine legal proceedings.
- FY2010 adopted new business-combination accounting guidance: acquisition-related costs were expensed as incurred, and acquired in-process research and development was capitalized rather than immediately expensed when applicable. These changes affect comparability with prior periods.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded its disclosure controls and internal financial controls were effective as of year-end.
Investor verification priorities
- Separate recurring operating performance from the $94.3 million IRS settlement benefit; review the effective tax rate and outstanding uncertain tax positions, including the $213.9 million gross unrecognized tax benefits.
- Assess whether revenue growth and backlog convert into recognized revenue and cash, considering renewal timing, customer payment terms, and collection risk; accounts receivable rose 43% and days sales outstanding increased to 44 from 34.
- Evaluate acquisition returns and integration progress against the $500.8 million FY2010 net cash acquisition outlay, and monitor the substantially higher goodwill and intangible-asset balances.
- Review liquidity by location: $685.5 million of cash, cash equivalents, and short-term investments was held in foreign accounts and considered indefinitely reinvested; working capital declined by half.
- Check the timing and terms of the revolving credit facility’s October 2011 maturity, covenant requirements, contractual obligations, and the potential exposure from the pending patent matter.