Synopsys, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended November 1, 2014 (presented as October 31); 52 weeks. The filing is an annual report, not a standalone Q4 filing. Amounts below are U.S. dollars.
Business context
Synopsys provides electronic design automation software, semiconductor intellectual property, hardware and services, and software quality and security tools. Most revenue is time-based: management says more than 90% comes from time-based licenses, maintenance and services. The acquisition of Coverity in March 2014 expanded the business into software quality and security solutions.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $2,057.5 million | $1,962.2 million | +4.9% |
| Gross profit / margin | $1,600.6 million / 77.8% | $1,508.7 million / 76.9% | Margin +0.9 percentage points |
| Operating income / margin | $248.7 million / 12.1% | $246.5 million / 12.6% | Income +0.9%; margin -0.5 points |
| Net income | $259.1 million | $247.8 million | +4.6% |
| Diluted EPS | $1.64 | $1.58 | +3.8% |
| Cash from operations | $551.0 million | $496.7 million | +10.9% |
Revenue mix: Time-based license revenue was $1,699.1 million (83% of revenue), up 6%; upfront license revenue was $135.8 million, up 3%; maintenance and service revenue was $222.6 million, down 4%. R&D expense rose 7% to $718.8 million. The effective tax rate was low, at about 4.8%, compared with about 10.1% in FY2013.
Q4 context: In the fourth quarter, revenue was $539.0 million versus $504.9 million a year earlier; net income was $62.5 million versus $56.9 million, and diluted EPS was $0.39 versus $0.36.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $985.8 million at year-end, down $36.7 million from FY2013. Approximately 83.6% of worldwide cash was held by foreign subsidiaries and considered indefinitely reinvested abroad.
- Working capital was $118.0 million, down from $225.1 million, primarily reflecting higher deferred revenue and other current liabilities. Accounts receivable increased 28% to $326.7 million; DSO rose to 55 days from 46.
- Total term-loan debt was $75.0 million ($30.0 million current and $45.0 million long-term); the $350 million revolving facility had no balance outstanding at year-end. In December 2014, the company drew $250 million under the revolver, primarily to fund a $180 million accelerated share repurchase.
- Operating cash flow was $551.0 million; investing activities used $497.3 million, including $394.6 million for acquisitions and intangible assets and $103.3 million for property and equipment. Financing activities used $73.7 million, including $119.7 million of share repurchases.
- Backlog was approximately $3.5 billion, up 13%; management expected $1.7 billion to be recognized after FY2015. Backlog is not a guarantee of future revenue.
Material changes, outlook and notable items
- Coverity was acquired for $375.5 million in cash. Its acquired deferred revenue was adjusted to fair value, and acquired intangible-asset amortization reduced FY2014 earnings; management expected a continued short-term earnings impact.
- Management described the business outlook as solid, citing technology leadership, customer relationships, time-based revenue, expense management and acquisitions. The filing provides no quantified revenue or earnings guidance.
- FY2014 net income benefited from tax settlements and other tax items, including $19.6 million in tax-settlement benefits and $6.7 million from federal statute lapses. The federal research credit had expired at year-end 2013, limiting its FY2014 benefit.
- A jury assessed approximately $36 million in damages against Synopsys in Mentor Graphics patent litigation concerning certain ZeBu product features. Synopsys planned to appeal and opposed a requested injunction; it accrued an immaterial amount and said it could not estimate losses exceeding that accrual.
- In November 2014, Synopsys initiated a voluntary retirement and minimal headcount-reduction program, with estimated costs of $15 million to $19 million.
- ASU 2014-09, the new revenue-recognition standard, was expected to take effect for Synopsys in FY2018. The company was evaluating its impact and had not selected a transition method.
Key investor risks and facts to verify
- Verify the sustainability of revenue and earnings growth, given customer concentration (Intel represented 10.5% of FY2014 revenue) and reliance on semiconductor and electronics design activity.
- Assess the quality of backlog, renewal and collection trends, particularly as DSO increased and backlog may be delayed, renegotiated or uncollected.
- Track Coverity integration, growth, acquired deferred-revenue effects and amortization, and whether the acquisition delivers expected benefits.
- Monitor the Mentor litigation appeal, injunction request and any additional financial exposure.
- Evaluate cash accessibility: most cash was offshore and treated as indefinitely reinvested; repatriation could trigger U.S. taxes. Also consider the December revolver draw and share repurchase.
- Consider the low FY2014 tax rate’s dependence on settlements and other discrete benefits, as well as the $124.1 million of gross unrecognized tax benefits and tax-audit uncertainty.
- Consider competitive, technology, cybersecurity, foreign-exchange, acquisition-integration and revenue-recognition risks described in the filing.