Synopsys, Inc. — Q1 Fiscal 2024 Form 10-Q
Reporting period: Quarter ended January 31, 2024. Fiscal Q1 2024 comprised 14 weeks, compared with 13 weeks in the prior-year quarter; the extra week contributed approximately $70.5 million of revenue and $61.0 million of expenses. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $1.649 billion | $1.361 billion | +21% |
| Gross margin | $1.320 billion; 80.0% | $1.077 billion; 79.1% | +23% gross profit |
| Operating income | $359.6 million; 21.8% margin | $255.9 million; 18.8% margin | +41% |
| Net income attributable to Synopsys | $449.1 million | $271.5 million | +65% |
| Diluted EPS | $2.89 | $1.75 | +65% |
| Operating cash flow | $(87.8) million | $114.8 million | Down $202.6 million |
Revenue by segment: Design Automation $985.3 million (+11%); Design IP $525.7 million (+53%); Software Integrity $138.2 million (+8%). Design IP growth was driven by stronger, timing-sensitive IP product demand. Segment adjusted operating margins were 37%, 47% and 17%, respectively.
Cash, cash equivalents and short-term investments totaled $1.273 billion at January 31, down from $1.591 billion at October 31, 2023. Current assets were $3.408 billion and current liabilities $2.645 billion. Long-term debt was $17.0 million; the company reported no revolver borrowings and compliance with its revolving-credit financial covenant. Total liabilities were $3.852 billion, including deferred revenue. Backlog was approximately $8.2 billion, including $1.3 billion of non-cancellable customer FSA commitments.
Material changes and notable items
- Reported revenue growth reflected expansion across product groups and geographies as well as the extra fiscal week. Design IP was the fastest-growing segment.
- Interest and other income rose to $105.5 million from $23.3 million. It included a $55.1 million gain on sales of strategic investments and $40.1 million of gains on deferred-compensation-plan assets. These items materially boosted reported net income.
- Operating cash flow turned negative, primarily due to higher operating disbursements, including vendor and tax payments. The company also cited deferred fiscal 2023 federal tax payments made in Q1 FY2024 and the cash-tax effect of capitalizing U.S. R&D expenditures for tax purposes.
- Cash used in financing was $187.2 million, including $147.3 million of taxes paid on net share settlements and $48.0 million of bridge-financing costs. Stock repurchases were substantially lower year over year; Synopsys said it was suspending the program in connection with the Ansys transaction.
- R&D expense rose 19%, sales and marketing 25%, and general and administrative expense 42%. Management attributed increases principally to employee-related costs; G&A also reflected merger-related legal, consulting and professional fees.
Outlook, transaction, risks and contingencies
- Ansys acquisition: Announced January 15, 2024, at an approximate $35 billion transaction value based on Synopsys’ December 21 share price. Consideration is $197 cash plus 0.3450 Synopsys shares per Ansys share, subject to a share-issuance cap adjustment. Closing was anticipated in the first half of calendar 2025, subject to shareholder, regulatory and other conditions. The filing states that financing is not a condition to closing.
- Financing: Synopsys entered a bridge commitment of up to $16.0 billion, later reduced to $11.7 billion after signing a $4.3 billion term-loan facility on February 13, 2024. The term loan is intended to fund part of the merger cash consideration and related costs. Management expects approximately $19 billion of cash consideration to be funded with cash and debt and stated that available liquidity and committed financing should meet requirements. The deal is expected to materially increase debt and liquidity needs.
- Business outlook: Management expected growth across geographies in FY2024 but anticipated a challenging near-term environment in China. It cited macroeconomic uncertainty and customer budget scrutiny, particularly affecting Software Integrity order size, pricing and contract duration. No quantified company-wide revenue or earnings guidance is provided in the supplied filing text.
- Software Integrity: Synopsys is exploring strategic alternatives for the segment; management said the outcome and potential effects were uncertain.
- Backlog realization: Approximately 40% of backlog excluding non-cancellable FSA commitments was expected to be recognized over the next 12 months. The company cautioned that backlog is not necessarily indicative of future sales or revenue.
- Key risks: Ansys closing, regulatory approval, integration and synergy execution; higher post-merger debt, floating-rate borrowing costs and covenant constraints; macroeconomic and China-related demand and trade risks; export controls; competition; customer concentration; cybersecurity; and fluctuations in upfront IP and hardware revenue. The filing notes BIS subpoenas concerning transactions with certain Chinese entities; Synopsys said it believes it is compliant and is responding, but cannot predict the outcome.
- Legal and tax matters: Bell Semic actions concluded after dismissals with prejudice and a no-cost patent license to Synopsys. Routine legal and tax examinations remain; no material assessments were reported in certain ongoing non-U.S. tax examinations. The company estimated possible decreases in unrecognized tax benefits over the next 12 months of $0–$5.4 million.
Most important facts for investors to verify
- Whether the Ansys merger obtains required shareholder and regulatory approvals, closes on schedule and achieves expected strategic benefits.
- The final funding mix, borrowing costs, leverage and covenant headroom after the merger; the term-loan and bridge commitments are financing capacity, not debt outstanding at quarter-end.
- How much Q1 growth persists after adjusting for the extra week and the timing-sensitive increase in Design IP and upfront-product sales.
- Whether operating cash flow recovers after Q1’s tax and vendor-payment outflows, and the continuing effect of U.S. R&D tax capitalization.
- Whether Software Integrity alternatives, China conditions, export-control developments or customer budget scrutiny materially change segment performance or demand.
- The degree to which Q1 earnings growth depends on non-recurring investment-sale gains and deferred-compensation-plan valuation changes.