Synopsys, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Fiscal first quarter ended January 31, 2016; income and cash-flow comparisons are against the three months ended January 31, 2015. Balance-sheet comparisons are against October 31, 2015. Amounts below are in U.S. dollars.
Business context
Synopsys provides electronic design automation software, semiconductor intellectual property, hardware and related services, as well as software quality and security tools. It operates as one reportable segment. Management says more than 90% of revenue continued to come from time-based arrangements, with revenue recognition reflecting sales efforts from prior periods.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $568.6 million | $542.0 million |
| Gross profit / margin | $439.2 million / 77.3% | $417.4 million / 77.0% |
| Operating income / margin | $71.1 million / 12.5% | $71.5 million / 13.2% |
| Net income | $60.0 million | $65.2 million |
| Diluted EPS | $0.39 | $0.41 |
| Cash used in operating activities | $35.2 million | $87.3 million |
| Cash used in investing activities | $29.5 million | $140.9 million |
| Cash from (used in) financing activities | $(182.3) million | $57.8 million |
- Revenue rose 5%, mainly from higher time-based license revenue on prior-period arrangements and, to a lesser extent, acquisitions. Time-based license revenue increased 8% to $464.3 million; upfront license revenue declined 7% to $43.4 million; maintenance and service revenue declined 6% to $60.9 million.
- Total costs and operating expenses increased 6% to $497.5 million, primarily reflecting higher headcount, including acquired employees. R&D rose 8% and sales and marketing rose 15%.
- Net income fell 8%, despite revenue growth. Operating income was nearly flat; other income (expense) shifted from $5.1 million income to $6.8 million expense, chiefly because of a $9.4 million loss on executive deferred-compensation-plan assets and lower foreign-exchange gains.
- The effective tax rate declined to 6.7% from 14.9%, primarily reflecting reinstatement of the U.S. federal research tax credit, partly offset by a higher valuation allowance on deferred tax assets.
- Cash, cash equivalents and short-term investments totaled $705.9 million at quarter-end, down $259.0 million from October 31, 2015. Cash from operations was negative; cash used in operations was lower than the prior-year quarter mainly due to billing and collection timing. Operating cash flow less property-and-equipment purchases was approximately negative $50.5 million.
Balance sheet, liquidity and capital returns
- Total assets were $4.75 billion and stockholders’ equity was $2.99 billion at January 31, 2016. Working capital was negative $232.8 million, compared with negative $109.6 million at October 31, 2015.
- Short-term debt was $227.5 million: $190.0 million drawn on the $500 million revolving facility and $37.5 million remaining on the term loan. The company reported compliance with its financial covenants. Revolver maturity is May 2020; remaining term-loan principal is due in October 2016, subject to scheduled installments.
- Management said existing cash and investments, operating cash generation and available revolver capacity should meet routine business requirements for at least the next 12 months. About 84% of worldwide cash, cash equivalents and short-term investments were held by international subsidiaries; repatriation may trigger U.S. taxes.
- Synopsys repurchased $180 million of shares during the quarter and had $300 million remaining under its repurchase authorization. The December 2015 accelerated share repurchase agreements were for $200 million; $40 million remained to be settled, expected by April 29, 2016.
Material changes, outlook and risks
- Management described the start to the year as very good and the business outlook as solid, citing technology, customer relationships, expense management and acquisitions. It expects time-based revenue to remain approximately 90% of total revenue. The filing provides no specific full-year revenue or earnings guidance.
- The company identifies semiconductor-industry demand, customer consolidation and spending, competition, acquisition integration, revenue timing, international operations, foreign-exchange movements and tax uncertainty as risks. One customer generated 12.2% of quarterly revenue.
- Synopsys disclosed unauthorized third-party access to its SolvNet customer license and product-delivery system, discovered in October 2015 and dating from July 2015. It reported no access to customer project or design data and no personal or payment-card information stored on that system, but cautioned that future breaches could harm its business and reputation.
- Patent litigation with Mentor Graphics remains material. A jury previously awarded approximately $36 million in damages, and an injunction restricts certain sales activities related to features found to infringe; Synopsys appealed. The filing also reports that the Federal Circuit affirmed, on February 10, 2016, the PTO decision concerning Mentor’s ’376 patent.
- Gross unrecognized tax benefits were $116.7 million at quarter-end; the timing and outcome of tax examinations remain uncertain. The company early adopted the deferred-tax balance-sheet classification standard retrospectively and is evaluating the impact of the new revenue-recognition standard, effective for its fiscal 2019 reporting.
- The company recorded $2.1 million of restructuring charges in the quarter. The larger fiscal 2015 restructuring program had been completed by October 31, 2015.
Most important facts for investors to verify
- Whether time-based license growth and customer bookings sustain revenue growth, given that current-period revenue largely reflects prior-period sales and one customer contributed 12.2% of revenue.
- Whether operating costs, acquisition-related expenses and amortization continue to pressure operating margins and earnings.
- Cash conversion and working-capital trends, including the negative quarterly operating cash flow and the timing of billings, collections and accrued compensation payments.
- Debt repayment and liquidity needs, particularly the term-loan maturity, revolver utilization, and the concentration of cash outside the United States.
- Developments in Mentor litigation and the potential financial or operational effects of the damages award and injunction.
- Cybersecurity developments, tax-audit outcomes and the eventual financial-reporting effects of adopting the new revenue-recognition standard.