Synopsys, Inc. — Fiscal 2019 Q3 Form 10-Q
Business context and period. Synopsys provides electronic design automation (EDA), semiconductor IP and system-design products, and software security and quality tools. This filing covers the quarter ended July 31, 2019, and the first nine months of fiscal 2019. Fiscal 2018’s comparable nine-month period included an additional week. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Revenue | $853.0 | $779.7 | $2,509.6 | $2,326.0 |
| Gross margin | $666.3; 78.1% | $594.3; 76.2% | $1,939.4; 77.3% | $1,780.7; 76.5% |
| Operating income | $127.6 | $64.0 | $390.5 | $298.7 |
| Net income | $99.9 | $79.4 | $371.7 | $178.2 |
| Diluted EPS | $0.65 | $0.52 | $2.42 | $1.16 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $579.3 | $293.5 |
- Q3 revenue rose 9%, operating income nearly doubled, and net income increased about 26% year over year. Q3 operating margin was 15.0%, versus 8.2%.
- Nine-month revenue rose 8% and operating income rose 31%. Nine-month net income more than doubled; year-over-year comparison also reflects materially different tax items and the prior-year extra week.
- Q3 revenue by segment: Semiconductor & System Design $769.4 million, up 9%; Software Integrity $83.6 million, up 17%. Segment adjusted operating margins were 27% and 11%, respectively; Software Integrity had a loss in the prior-year quarter.
- Revenue mix shifted: time-based products fell 6% in Q3 to $537.6 million, while upfront products rose 78% to $177.6 million and maintenance and service rose 25% to $137.8 million.
- Cash and cash equivalents were $686.8 million at July 31, down from $723.1 million at October 31, 2018. Nine-month operating cash flow was $579.3 million; capital expenditures were $122.4 million.
- Current assets were $1.62 billion and current liabilities $1.63 billion, leaving a $12.9 million working-capital deficit, much narrower than the $558.6 million deficit at fiscal year-end.
- Reported short- and long-term debt totaled about $141.9 million. The $650 million revolver had no balance outstanding; the company reported $123.5 million outstanding under its term loan and $18.4 million under a China facility. It was in compliance with credit covenants.
Material changes and accounting comparability
- Synopsys adopted ASC 606 at the start of fiscal 2019 using the modified-retrospective method; prior periods were not restated. The standard changes the timing of some revenue recognition, particularly for IP licenses and related support, and affects revenue and commission expense comparisons.
- For Q3, the company’s ASC 606 revenue was $853.0 million; it disclosed that revenue would have been $808.4 million under ASC 605, and net income $67.2 million rather than $99.9 million. The nine-month ASC 605 comparatives were revenue of $2,459.0 million and net income of $322.9 million, versus ASC 606 reported figures of $2,509.6 million and $371.7 million.
- Management says ASC 606 did not change cash flows or how the business is operated. It expects approximately 80%–85% of non-hardware revenue to be time-based or recognized over time.
- Cash from operations increased substantially year over year, while investing cash use fell chiefly because the prior-year period included $646.7 million of acquisition spending. Financing cash use increased, reflecting debt repayments and repurchases.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance for the next quarter or full fiscal year is provided in the supplied filing text. Management expects cash, operating cash generation, and available revolver capacity to meet routine requirements for at least the next 12 months.
- A fiscal 2019 restructuring program is expected to cost $43 million–$65 million, mainly for severance and voluntary retirement benefits, with completion anticipated by Q2 FY2020. Charges were $19.3 million in Q3 and $33.7 million in the first nine months; $20.8 million remained accrued at July 31.
- Q3 tax expense included an $18.3 million charge related to the Ninth Circuit’s Altera decision. The company had also recorded a $17.4 million tax expense in Q2 after an adverse Hungarian court ruling; it appealed to Hungary’s Supreme Court. Management said possible decreases in unrecognized tax benefits over the next 12 months were estimated at $0–$6 million.
- One customer, including subsidiaries, accounted for more than 10% of revenue in both the quarter and nine-month periods. The company cautions that customer concentration and industry consolidation could affect results.
- Beginning in May 2019, U.S. Entity List restrictions prevented new business with certain entities and placed related revenue on hold until contracts expire or restrictions are lifted. The filing also identifies trade disruption, tariffs, export restrictions, semiconductor-sector weakness, competitive pressure, cybersecurity, and foreign-currency movements as risks.
- Operating lease accounting under ASU 2016-2 is expected to have a material impact on the balance sheet when adopted in fiscal 2020. The company reported no material change in market risk exposure from October 31, 2018.
Key facts for investors to verify
- Assess reported growth using ASC 606 versus ASC 605 disclosures, including the altered timing of IP revenue and the lack of restated prior periods.
- Check the sustainability of growth in upfront IP revenue, maintenance, and Software Integrity, and the implications of lower time-based product revenue.
- Track restructuring costs against the $43 million–$65 million expected range and monitor execution and segment margins.
- Review tax developments, especially the Altera-related charge, the Hungarian appeal, and changes in uncertain tax positions.
- Monitor the effect of Entity List restrictions, customer concentration, and international trade conditions on bookings, recognized revenue, and collections.
- Reconcile debt classifications and maturities, monitor liquidity despite the small working-capital deficit, and consider planned repurchases and lease-accounting adoption.