Synopsys, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended October 28, 2017 (presented as October 31, 2017); 52 weeks. The filing also reports unaudited fiscal Q4 results. Fiscal 2018 was expected to be a 53-week year. Synopsys provides electronic design automation (EDA) software, semiconductor IP, hardware and services, and software security and quality tools.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $2,724.9 million | $2,422.5 million |
| Gross margin | $2,070.7 million; 76.0% | $1,879.6 million; 77.6% |
| Operating income | $347.6 million; 12.8% margin | $317.4 million; 13.1% margin |
| Income before taxes | $383.1 million | $329.5 million |
| Income tax provision / effective rate | $246.5 million / 64.4% | $62.7 million / 19.0% |
| Net income / diluted EPS | $136.6 million / $0.88 | $266.8 million / $1.73 |
| Cash from operating activities | $634.6 million | $586.6 million |
Revenue grew 12%, led by time-based subscription licenses, hardware, and professional services. Revenue mix: time-based products $2,021.8 million (+6%); upfront products $338.2 million (+36%); maintenance and service $364.9 million (+38%). Time-based products were 74% of revenue, and management said 88% of FY revenue was time-based. Intel and subsidiaries represented 17.9% of revenue, up from 15.9%.
Fiscal Q4: Revenue was $696.6 million versus $633.7 million a year earlier; gross margin was $529.8 million versus $491.5 million. Q4 net loss was $120.1 million, or $0.80 diluted loss per share, compared with net income of $72.7 million, or $0.47 per diluted share, in Q4 FY2016. The filing’s quarterly table does not separately state the Q4 tax provision; the annual tax charge was primarily affected by foreign-earnings repatriation and other tax items.
Liquidity and capital: Cash and cash equivalents were $1,048.4 million at year-end, down from total cash and short-term investments of $1,117.3 million in FY2016; no short-term investments remained after the company sold its available-for-sale portfolio. Working capital was $68.5 million, versus $2.0 million. Debt was $144.0 million under the term loan, with no revolver borrowings at year-end; $134.1 million was classified as long-term debt. The company repurchased $380 million of stock during FY2017 and had $400 million of authorization remaining at year-end.
Material changes and unusual items
- Net income and diluted EPS fell substantially despite revenue and operating-income growth, principally because the tax provision rose to $246.5 million. This included $166.2 million of tax expense related to repatriating $825 million of foreign earnings, in anticipation of potential U.S. tax reform.
- Operating expenses included $36.6 million of restructuring charges and a $39 million accrual for Mentor Graphics patent litigation; G&A also included a $30.4 million gain from a legal settlement.
- The Hungarian tax authority assessed approximately $47 million plus more than $18 million in interest and penalties for FY2011–FY2013. Synopsys paid the assessment in November 2017 while contesting it in court. Management said it believed the assessment lacked merit.
- Operating cash flow increased by $48.0 million. Investing activities used $189.3 million, including $259.2 million for acquisitions and intangible assets; financing activities used $373.1 million, including debt repayments and share repurchases.
- Subsequent to year-end, Synopsys drew $450 million under its revolving facility. It completed the acquisition of Black Duck Software on December 11, 2017, paying approximately $547 million net of cash acquired, funded with U.S. cash.
Outlook, risks and contingencies
Management characterized the business outlook as solid, citing technology leadership, customer relationships, its time-based licensing model, expense management and acquisitions. It expected time-based revenue to remain at least 90% of revenue excluding hardware; no quantified FY2018 revenue or earnings guidance is provided in the supplied filing text. Management cautioned that hardware sales, large contract renewals, customer spending and revenue recognition timing can increase variability. Backlog was approximately $3.7 billion at year-end, up from $3.5 billion; $1.5 billion was expected to be recognized after FY2018, but backlog is not a reliable guarantee of future revenue.
Key risks include dependence on semiconductor and electronics investment and a small number of large customers; customer concentration and consolidation; intense competition and rapid technology change; acquisition integration and execution; cybersecurity threats; international, currency and tax exposure; and product defects, third-party IP claims and hardware supplier constraints. Mentor litigation remained ongoing, with potential losses beyond the $39 million accrued amount. The company reported effective disclosure controls and internal control over financial reporting; its independent auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Underlying earnings and future tax rate after the one-time repatriation charge, valuation-allowance changes and other FY2017 tax items.
- Resolution and possible additional exposure from Mentor patent litigation and the Hungarian tax dispute.
- Whether revenue growth, backlog conversion and high customer concentration—particularly Intel’s 17.9% share—are sustainable.
- Post-year-end liquidity and leverage after the $450 million revolver draw and Black Duck acquisition, including subsequent share repurchases.
- Effects of upcoming revenue-recognition and lease-accounting standards on reported results and backlog.