Synopsys, Inc. — Q2 FY2022 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 fiscal quarter and six months ended April 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $1,279.2 million | $1,024.3 million | $2,549.5 million | $1,994.6 million |
| Gross margin | $1,026.4 million; 80.2% | $810.3 million; 79.1% | $2,039.7 million; 80.0% | $1,572.7 million; 78.8% |
| Operating income | $363.7 million | $194.2 million | $710.7 million | $342.6 million |
| Net income attributable to Synopsys | $294.8 million | $195.1 million | $608.5 million | $357.4 million |
| Diluted earnings per share | $1.89 | $1.24 | $3.88 | $2.27 |
| Operating cash flow | Not separately stated | Not separately stated | $905.7 million | $700.3 million |
- Q2 revenue rose 25%; operating income rose 87%. Management attributed revenue growth to expansion across product groups and geographies, with growth in both reportable segments.
- Semiconductor & System Design revenue was $1,166.4 million in Q2, up 25%; Software Integrity revenue was $112.9 million, up 20%. Segment adjusted operating margins were 39% and 12%, respectively, versus 33% and 9% a year earlier.
- By revenue type, Q2 time-based products grew 12% to $723.8 million; upfront products grew 61% to $336.6 million; maintenance and services grew 31% to $218.8 million. The larger upfront-products contribution reflects higher IP and hardware sales; the filing notes this revenue can fluctuate with order timing and customer requirements.
- Q2 total cost of revenue and operating expenses increased 10% to $915.5 million, slower than revenue growth. Higher personnel-related costs from hiring and acquisitions were a significant factor.
- Six-month investing cash outflow was $186.0 million, including $109.1 million for acquisitions and $67.4 million for property and equipment. Financing cash outflow was $559.1 million, including $500.0 million of treasury-stock purchases and $75.9 million of debt repayment.
Balance sheet and liquidity
- At April 30, 2022, cash, cash equivalents and short-term investments totaled $1.721 billion, compared with $1.581 billion at October 31, 2021. Cash and cash equivalents included approximately $758.8 million domiciled outside the United States.
- Total debt was approximately $23.8 million, consisting of the China facility; there was no borrowing under the $650 million revolving credit facility. Synopsys reported compliance with its credit agreement financial covenants.
- Current assets were $3.074 billion and current liabilities $2.463 billion. Current liabilities included $1.795 billion of current deferred revenue. Total deferred revenue, including long-term amounts, was $1.961 billion.
- Operating cash flow exceeded net income for the six-month period. The increase versus 2021 primarily reflected higher net income and the timing of customer billings, partly offset by higher operating, vendor and tax payments.
Changes, outlook and matters to monitor
- Contracted but unsatisfied or partially unsatisfied performance obligations were approximately $7.3 billion, including $1.0 billion of non-cancellable Flexible Spending Account commitments. Excluding those commitments, about 41% was expected to be recognized over the next 12 months. These obligations are not equivalent to guaranteed revenue.
- The filing provides no specific numerical full-year revenue or earnings guidance. Management said it had not identified trends expected to materially affect future operating results at that time, while emphasizing that interim results do not necessarily indicate full-year performance.
- Other income and expense was a $23.9 million expense in Q2, versus $21.8 million of income in the prior-year quarter. The main driver was a $29.3 million loss on assets related to the executive deferred compensation plan; the filing says associated plan expenses also affect operating expense categories.
- The six-month effective tax rate was 9.0%, broadly consistent with 9.2% a year earlier; the Q2 rate rose to 13.5% from 9.8%, primarily due to fewer excess stock-compensation tax benefits. Management said resolution of certain audits or expiration of statutes could reduce unrecognized tax benefits by $0–$40 million over the coming 12 months.
- The Hungarian tax dispute concerns an assessment of approximately $25 million in withholding taxes plus $11 million in interest and penalties. The Hungarian Supreme Court vacated a lower-court decision and remanded the matter; a further hearing was scheduled for June 30, 2022. The assessment had been paid under local law.
- Synopsys acquired a 75% interest in OpenLight for $90 million cash; the remaining interest has redemption features. The recorded redeemable non-controlling interest was $43.5 million at quarter-end. Management characterized the quarter’s acquisitions as not material to the financial statements.
- Management reported that COVID-19 and semiconductor-supply disruptions had caused only minor operational effects to date, but noted substantial uncertainty. It suspended business operations in Russia in Q2 and said this had no material impact to date. Risks include economic and semiconductor-industry conditions, customer spending and concentration, export controls and sanctions, competition, cybersecurity, hardware supply constraints, acquisitions, foreign exchange and tax or legal outcomes.
Investor verification priorities
- Assess the sustainability and mix of growth, particularly the sharp increase in upfront IP and hardware revenue and its timing sensitivity.
- Review the $7.3 billion performance-obligation balance, the FSA component, and the expected timing of conversion to recognized revenue and cash.
- Separate operating performance from deferred-compensation investment gains or losses and assess the effect of stock-based compensation and acquisition-related costs.
- Track operating cash conversion, receivables and deferred revenue, alongside the pace of planned repurchases and acquisition spending.
- Monitor the Hungarian tax proceeding, potential tax-benefit changes, and developments in export restrictions, sanctions, supply chains and customer demand.