Business context and reporting period
Synopsys provides electronic design automation software, semiconductor intellectual property, hardware and related services, and software quality and security tools. This Form 10-Q covers fiscal Q2 and the first six months of fiscal 2015; statements are presented as of and for periods ended April 30, 2015, while the company notes the fiscal quarter actually ended May 2, 2015.
Financial performance and position
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $557.2 million | $517.7 million | $1,099.2 million | $996.6 million |
| Gross margin | $432.2 million (77.6%) | $403.6 million (78.0%) | $849.6 million (77.3%) | $776.7 million (78.0%) |
| Operating income | $75.9 million | $63.8 million | $147.4 million | $124.0 million |
| Net income | $55.6 million | $63.3 million | $120.8 million | $131.0 million |
| Diluted EPS | $0.35 | $0.40 | $0.77 | $0.83 |
- Quarterly revenue grew 8% and operating income 19%; net income fell 12%, primarily because the tax provision rose to $28.3 million from $4.7 million. The effective tax rate was 33.7%, versus 7.0%.
- For the six months, revenue increased 10%, operating income increased 19%, and net income decreased 8%. The six-month effective tax rate was 24.7%, versus 5.9%.
- Revenue mix in Q2: time-based licenses $447.8 million (+6%); upfront licenses $44.3 million (+22%); maintenance and services $65.0 million (+14%). Management said more than 90% of revenue continued to be time-based under its business model.
- Six-month operating cash flow was $67.7 million, compared with $37.9 million. Investing cash outflow was $184.3 million, versus $392.4 million; financing cash inflow was $18.5 million, versus $157.4 million. Cash and cash equivalents ended at $868.8 million; including short-term investments, liquidity was $1,005.4 million.
- At April 30, working capital was $220.0 million, up from $117.9 million at October 31, 2014. Total debt was $220 million: $160 million short-term revolver borrowings and $60 million term-loan borrowings. Total liabilities were $1.69 billion.
Material changes and unusual items
- Growth reflected organic expansion and prior-year acquisitions, including Coverity. Professional services and other revenue increased, primarily from IP consulting projects; maintenance revenue declined 15% in the quarter.
- Operating expenses increased with higher headcount and acquisition-related costs. The company recorded $15.3 million of restructuring charges in the first half for a voluntary retirement program and limited headcount reductions; $1.0 million remained payable at quarter-end.
- Share repurchases included a $180 million accelerated repurchase initiated in December 2014, funded primarily with revolver borrowings. The company had $200.3 million remaining under its repurchase authorization at April 30.
- On May 19, 2015, after quarter-end, Synopsys amended its credit agreement, increasing the revolving facility from $350 million to $500 million and extending its termination to May 2020.
Outlook, commentary and risks
- Management described the business outlook as solid, citing technology leadership, customer relationships, the time-based revenue model, expense management and acquisitions. It stated that cash, investments, operating cash generation and available credit should meet routine needs for at least the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- Key exposures include semiconductor-sector spending and design activity, competition, customer and contract timing, acquisition integration, foreign exchange, tax-rate variability, and reliance on international operations. Approximately 84.5% of cash, cash equivalents and short-term investments was held by foreign subsidiaries and treated as indefinitely reinvested; repatriation could trigger additional U.S. taxes.
- One customer accounted for 12.3% of quarterly revenue. Gross unrecognized tax benefits were $129.9 million; the company said the amount could decrease by $0–$37 million in the coming 12 months as audits or statutes of limitations resolve.
- In Mentor Graphics patent litigation, a jury assessed approximately $36 million in damages, and the court entered an injunction restricting certain sales activities involving ZeBu features. Synopsys said it released software without those features and appealed the injunction and final judgment. Other patent proceedings and appeals were also ongoing.
- The company was evaluating new revenue-recognition guidance (ASC 606); it had not selected a transition method or determined the financial-reporting impact. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and the high proportion of time-based revenue continue, and how license, services and hardware mix affects results.
- Whether operating margin improvement is sustained as employee-related and acquisition-related expenses rise.
- The drivers and duration of the higher effective tax rate, including acquired-technology integration, tax credits and uncertain tax positions.
- Cash generation, foreign cash accessibility, revolver usage and the impact of the amended credit agreement and its covenants.
- The outcome and potential financial or operational effects of the Mentor litigation, including the damages assessment and injunction.
- The eventual effect and implementation approach for ASC 606 and the resolution of tax examinations.