Synopsys, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended January 31, 2021; comparisons are with the three months ended January 31, 2020. Synopsys provides electronic design automation (EDA), semiconductor IP and related services, and software security and quality products.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $970.3 million | $834.4 million | +16% |
| Gross margin | $762.3 million; 78.6% | $641.5 million; 76.9% | +1.7 percentage points |
| Operating income | $148.3 million; 15.3% of revenue | $87.5 million; 10.5% of revenue | +70% |
| Net income attributable to Synopsys | $162.3 million | $104.1 million | +56% |
| Diluted EPS | $1.03 | $0.67 | +54% |
| Operating cash flow | $174.0 million | $9.8 million | +$164.2 million |
Revenue growth was attributed primarily to continued organic growth. Time-based product revenue rose 13% to $631.3 million; upfront product revenue increased 16% to $174.4 million, primarily on higher IP sales; maintenance and service revenue increased 29% to $164.7 million.
Semiconductor & System Design revenue was $878.4 million, up 17%, with adjusted operating income of $278.9 million and a 32% adjusted margin (24% prior year). Software Integrity revenue was $92.0 million, up 7%; adjusted operating income was $7.9 million versus $8.1 million, and its adjusted margin remained 9%.
Cash, debt and liquidity
Cash and cash equivalents were $1.023 billion at January 31, down $212.6 million from October 31, 2020. Cash from operations was partly offset by $103.5 million of investing outflows and $293.1 million of financing outflows. Financing included $202.9 million of treasury-stock purchases and a $50.0 million equity forward payment. Working capital was $226.3 million, down from $409.3 million.
Debt totaled approximately $123.1 million, including $97.4 million under the term loan and $25.7 million under a China facility; there were no revolver borrowings. The amended $650 million revolving facility now runs to January 2024. The company reported compliance with its financial covenants and said existing cash, operating cash flow and available credit should meet foreseeable requirements.
Material changes, outlook and risks
- Operating expenses rose, mainly from employee-related costs, acquisitions and deferred compensation. Stock-based compensation increased to $83.8 million from $51.9 million.
- Other income was $28.8 million, including a $30.9 million gain on assets associated with the executive deferred compensation plan, compared with a $12.5 million gain in the prior-year quarter. This non-operating item materially contributed to the increase in pretax income.
- The effective tax rate was 8.5%, versus a 4.5% benefit in the prior-year quarter. The filing cites California limits on R&D tax credits, partly offset by stock-compensation tax benefits.
- The company gave no specific numeric quarterly or full-year guidance in the provided filing text. Management reported minor COVID-19 operating and hardware-supply disruptions to date, but noted uncertainty and slower customer commitments in Software Integrity. Revenue recognized over multi-year license terms may delay the effect of changes in demand.
- Key risks include semiconductor and electronics industry demand, dependence on large customers and renewals, revenue variability from upfront IP and hardware sales, competition, export controls and trade restrictions, cybersecurity, and acquisition integration. The company said recent U.S. export restrictions were not expected to materially affect it at that time, while warning that further changes could.
- A Hungarian tax dispute remains pending: the Supreme Court remanded the case for further proceedings, with a rehearing scheduled for April 27, 2021. The company had paid the assessment and related amounts while contesting it. Separately, management said potential decreases in unrecognized tax benefits over the next 12 months could range from $0 to $43 million.
- The company completed two acquisitions for aggregate consideration of $77.5 million, net of cash acquired. It also had $205.1 million remaining under its repurchase authorization at quarter-end; a $250 million accelerated repurchase agreement was not yet fully settled.
Important facts for investors to verify
- Whether revenue growth and segment margins continue, especially in Semiconductor & System Design, and whether Software Integrity customer commitments recover.
- How much of operating cash flow reflects sustainable earnings versus timing of collections, vendor payments and deferred revenue.
- The contribution and volatility of deferred-compensation asset gains to reported net income.
- The final share count and settlement of the December 2020 accelerated repurchase, and the effects of buybacks and stock-based compensation on dilution.
- Developments in the Hungarian tax case, other tax examinations, and the company’s effective tax rate.
- Any material effects from COVID-19, hardware supply constraints, or U.S.-China export and trade restrictions.