Synopsys, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Fiscal quarter ended January 31, 2022 (the operating quarter ended January 29); compared with the three months ended January 30, 2021. Amounts are in U.S. dollars unless noted.
Business context and results
Synopsys supplies electronic design automation (EDA), semiconductor intellectual property (IP), system design and validation products, and software security and quality tools. It reports two segments: Semiconductor & System Design and Software Integrity.
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $1.270 billion | $970.3 million |
| Gross margin | $1.013 billion; 79.8% | $762.3 million; 78.6% |
| Operating income / margin | $347.0 million / 27.3% | $148.3 million / 15.3% |
| Net income | $313.3 million | $162.0 million |
| Net income attributable to Synopsys, diluted EPS | $313.7 million; $1.99 | $162.3 million; $1.03 |
| Cash from operating activities | $155.7 million | $174.0 million |
Revenue, margins, and period-over-period changes
- Revenue increased 31%, primarily from growth across product groups and geographies. Semiconductor & System Design revenue rose 32% to $1.163 billion; Software Integrity rose 17% to $107.6 million.
- Time-based products revenue increased 12% to $707.5 million. Upfront products revenue more than doubled, rising 111% to $368.3 million, primarily from higher IP and hardware sales. Maintenance and service revenue rose 18% to $194.5 million.
- Gross margin improved to 79.8% from 78.6%; operating margin rose to 27.3% from 15.3%. Management attributed higher operating income principally to revenue growth exceeding expense growth.
- Total cost of revenue and operating expenses increased 12% to $923.2 million, including higher employee-related costs and $11.7 million of restructuring charges. Segment adjusted operating margins were 38% for Semiconductor & System Design (32% prior year) and 11% for Software Integrity (9% prior year).
- Other expense was $19.8 million, compared with $28.8 million of other income a year earlier. The main driver was a $19.6 million loss on assets related to the executive deferred compensation plan, versus a $30.9 million gain in the prior-year quarter.
- The effective tax rate declined to 4.2% from 8.5%, primarily due to excess tax benefits from stock-based compensation, among other tax benefits.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was $155.7 million, down from $174.0 million despite higher net income. Management cited timing of customer billings and collections and higher operating, vendor, and tax payments. Accounts receivable increased to $1.039 billion from $568.5 million at October 31, 2021; deferred revenue increased to $2.010 billion from $1.654 billion.
- Investing activities used $68.0 million, including $41.8 million for property and equipment and $20.0 million for an acquisition. Financing activities used $394.6 million, including debt repayment, share repurchases, and taxes related to net share settlement of equity awards.
- Cash, cash equivalents, and short-term investments totaled $1.272 billion at January 31, 2022, down from $1.581 billion at October 31, 2021. Approximately $792.9 million of cash and cash equivalents was held in foreign jurisdictions.
- Debt totaled approximately $24.4 million, all long-term; there was no balance outstanding under the $650 million revolving credit facility. The company reported compliance with its credit-facility covenants.
- The board authorized up to $1.0 billion in share repurchases in December 2021; $750 million remained available at quarter-end. The company reported approximately $245 million of repurchases during the quarter. Management said existing liquidity and other sources should meet cash requirements and the capital return program over the next 12 months and beyond.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management described continued growth opportunities in EDA, IP, and software security and quality, but cautioned that quarterly revenue can vary with renewals, upfront IP and hardware sales, royalties, consulting projects, and customer FSA drawdowns.
- Contracted but unsatisfied or partially unsatisfied performance obligations were approximately $6.9 billion, including $866.9 million of non-cancellable customer FSA commitments. Excluding those FSA commitments, approximately 41% was expected to be recognized over the next 12 months.
- COVID-19 had caused minor operational and hardware-supply disruptions and a prior slowdown in Software Integrity customer commitments; management reported no identified trends expected to materially affect future results at that time. The filing emphasizes continued uncertainty and possible impacts on customers, suppliers, demand, and estimates.
- Other highlighted risks include semiconductor and electronics industry conditions, customer concentration and spending, competition, hardware supply constraints (including reliance on a sole supplier for certain components), foreign-exchange exposure, and U.S.–China trade and export restrictions. Synopsys disclosed an administrative subpoena from the U.S. Bureau of Industry and Security concerning transactions with certain Chinese entities; it said it was cooperating and could not predict the outcome.
- A Hungarian tax dispute involves an assessment of approximately $25 million in withholding taxes plus $11 million in interest and penalties, which the subsidiary paid. In January 2022, Hungary’s Supreme Court vacated a lower-court decision and remanded the case for further proceedings. The filing also says a decrease of $0–$45 million in underlying unrecognized tax benefits was reasonably possible within 12 months, subject to uncertainty.
- The fiscal 2021 restructuring plan was completed in Q1 FY2022. Total plan charges were $45.2 million; $21.0 million of related liabilities remained outstanding at quarter-end.
Important facts for investors to verify
- Whether the exceptional increase in upfront IP and hardware revenue is sustained, and how the product mix affects future revenue and margins.
- Whether the increase in receivables and the timing-related decline in operating cash flow reverse in subsequent quarters.
- How much of the $6.9 billion performance-obligation balance converts to revenue, particularly the timing and customer drawdown of FSA commitments.
- Developments in the Hungary tax dispute, other tax examinations, and the BIS inquiry, including any resulting financial or operating effects.
- Future share repurchase pace and cash use, alongside acquisition spending, liquidity, and the impact of foreign-held cash.