Synopsys, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 29, 2023, presented using an April 30 calendar month-end date; comparisons are with the corresponding 2022 periods. Synopsys provides electronic design automation (EDA), semiconductor intellectual property (IP), and software security and quality products and services.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1.395 billion | $1.279 billion | $2.756 billion | $2.549 billion |
| Operating income | $287.3 million | $363.7 million | $543.3 million | $710.7 million |
| Net income attributable to Synopsys | $272.9 million | $294.8 million | $544.4 million | $608.5 million |
| Diluted EPS | $1.76 | $1.89 | $3.51 | $3.88 |
| Operating cash flow | Not provided separately for Q2 | Not provided separately for Q2 | $817.7 million | $905.7 million |
Q2 revenue increased 9%, while operating income fell 21% and diluted EPS fell 7%. Gross margin was approximately 78.6%, versus 80.2% a year earlier; operating margin was approximately 20.6%, versus 28.4%. For the six-month period, revenue increased 8%, while operating income decreased 24% and diluted EPS decreased 10%. The filing attributes expense growth to factors including higher employee-related costs, stock-based compensation, facilities costs and amortization.
Q2 revenue by segment was Design Automation $927.6 million (+13%), Design IP $335.2 million (-4%), and Software Integrity $132.1 million (+17%). Design IP adjusted operating margin declined to 26% from 39%; Design Automation was 39% versus 39%, and Software Integrity improved to 14% from 12%. The company began reporting three segments in fiscal 2023 and reclassified prior-period segment information.
Balance sheet, liquidity and capital allocation
- Cash, cash equivalents and short-term investments totaled $1.695 billion at April 30, 2023, up from $1.566 billion at October 31, 2022. Approximately $834 million of cash and cash equivalents was held in foreign jurisdictions.
- Current assets were $3.161 billion and current liabilities were $2.749 billion. Deferred revenue totaled $2.160 billion, including $1.969 billion current.
- Long-term debt was $20.2 million; no amount was drawn on the $850 million revolving credit facility. An additional $150 million incremental facility is uncommitted. The company reported compliance with its leverage covenant.
- Six-month operating cash flow was $817.7 million; investing activities used $127.7 million and financing activities used $591.2 million. Financing outflows included $560.7 million of treasury-stock purchases.
- The company repurchased approximately 1.63 million shares for $560.7 million in the six months. $794.3 million remained available under its repurchase authorization at April 30.
Material changes, outlook and risks
- Time-based product revenue rose 12% in Q2, supported by subscription-license revenue and renewals. Upfront product revenue rose 3% in Q2 but declined 3% for the six-month period, reflecting timing of IP and hardware sales.
- Research and development expense increased 25% in Q2 and 23% for the six-month period. Stock-based compensation expense was $277.5 million for six months, compared with $205.8 million a year earlier.
- Fiscal 2023 restructuring charges were $45.0 million for six months. Total plan charges are expected to be $50–$70 million, with completion anticipated in Q3.
- Other income was $4.3 million in Q2, compared with expense of $23.9 million a year earlier; for six months it was income of $27.5 million versus expense of $43.7 million. The change principally reflected fair-value movements in executive deferred-compensation plan assets.
- Management said cash, investments and available liquidity should be sufficient for requirements and the capital-return program over the next 12 months and beyond. The filing provides no specific revenue or EPS guidance.
- Management described a minor macroeconomic impact in Software Integrity, where some customers scrutinized spending and opted for shorter contracts. It cautioned that macroeconomic weakness, customer spending delays, semiconductor-industry conditions, foreign exchange, and U.S.–China trade and export restrictions could affect results; management said current export controls were not expected to have a material impact based on its understanding.
- U.S. tax rules requiring capitalization and amortization of R&D spending are increasing fiscal 2023 cash tax liabilities. Federal cash tax payments were deferred to Q4 under IRS relief for California winter storms.
- Bell Semiconductor patent litigation includes claims involving EDA tools used by Synopsys customers; Synopsys is not named as a defendant but is defending some customers under license agreements. Bell Semic moved to withdraw the ITC investigations, while declaratory-judgment actions were set for trial in January 2024. A Hungarian tax court issued a favorable written decision on May 17, 2023, after quarter-end; it may be appealed.
Important facts for investors to verify
- Whether revenue growth, particularly in Design Automation, continues to outpace increases in operating expenses and support margins.
- How Design IP revenue and adjusted margins develop given the reported weakness and timing-related volatility in IP sales.
- Whether restructuring charges remain within the stated $50–$70 million plan estimate and whether expected benefits materialize.
- The cash-flow and tax effects of R&D capitalization, along with the timing of customer collections and deferred revenue conversion.
- Developments in export controls, macroeconomic conditions, Bell Semic litigation and the appeal period in the Hungarian tax matter.