Synopsys, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Fiscal third quarter ended July 30, 2011 (financial statements presented through July 31); nine-month period ended July 31, 2011. Comparisons are with the corresponding fiscal 2010 periods. Synopsys sells electronic design automation software, semiconductor IP, hardware and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $386.8 | $336.9 | $1,145.1 | $1,005.2 |
| Gross margin | $302.1; 78.1% | $270.2; 80.2% | $890.0; 77.7% | $803.9; 80.0% |
| Operating income | $58.2; 15.0% | $50.8; 15.1% | $156.5; 13.7% | $150.9; 15.0% |
| Net income | $52.1 | $39.3 | $181.4 | $211.7 |
| Diluted EPS | $0.35 | $0.26 | $1.20 | $1.40 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $367.3 | $244.1 |
- Q3 revenue grew 15%; nine-month revenue grew 14%. Time-based license revenue was $322.1 million in Q3, 83% of revenue; upfront licenses were $19.0 million and maintenance and services were $45.6 million.
- Q3 net income rose 32% year over year, helped by revenue growth and a lower effective tax rate. Nine-month net income declined 14% despite higher revenue and pretax income, largely reflecting the prior-year period’s larger IRS settlement benefit.
- Cost growth outpaced revenue: Q3 cost of revenue rose 27%, and operating expenses rose 11%. Higher acquisition-related headcount and intangible amortization contributed to expense growth. Gross margin declined year over year in both periods.
- Nine-month operating cash flow increased 50%, which management attributed mainly to customer collections and billing timing. Deferred revenue contributed a $116.0 million cash-flow increase, versus $32.2 million in the prior-year period.
- At July 31, cash and cash equivalents were $889.9 million and short-term investments were $148.4 million, totaling $1.038 billion, up $99.7 million from October 31, 2010. Working capital was $380.2 million; accounts receivable was $175.4 million and DSO was 41 days.
- No borrowings were outstanding under the $300 million revolving credit facility, and Synopsys reported covenant compliance. The facility was scheduled to terminate October 20, 2011. The filing reports no other material debt balance.
- Nine-month investing cash outflow was $39.1 million, including $42.8 million of property and equipment purchases and $5.4 million for acquisitions and intangible assets, partly offset by investment activity. Financing cash outflow was $219.8 million, including $335.0 million of share repurchases.
Changes, outlook and material considerations
- Revenue growth reflected overall business expansion, prior-year acquisitions, contract renewals and higher professional services revenue. Professional services and other revenue rose 70% in Q3; maintenance revenue was down 6% in Q3 and flat for the nine months.
- Management described the outlook as positive, citing semiconductor-industry growth forecasts, customer relationships, product breadth and acquisition opportunities. It said it would monitor economic and market conditions and adjust the business if customer spending weakened. The filing provides no quantified forward guidance.
- Management said more than 90% of revenue is generally recurring and that the company typically enters a quarter with more than 90% of that quarter’s revenue committed. Customer license contracts average about three years. The company also cautioned that semiconductor customers remained cost-conscious amid global market volatility.
- Of cash, cash equivalents and short-term investments, $700.6 million was held in foreign subsidiaries and considered indefinitely reinvested. Repatriation could require additional U.S. tax if not previously accrued.
- The nine-month effective tax rate was negative 9.6%, affected by a $32.8 million net tax benefit from the fiscal 2006–2009 IRS settlement; the comparable FY2010 period included a $94.3 million benefit from an earlier settlement. Management said potential decreases in unrecognized tax benefits over the next 12 months could range from $0 to $85 million, with timing and outcomes uncertain.
- One customer represented 10.5% of revenue in both the three- and nine-month periods. Routine legal claims and threatened litigation are disclosed; unfavorable outcomes could affect results, and the filing does not quantify a specific material litigation reserve.
- Other items to note: the company recorded a $3.8 million nine-month R&D expense reduction from remeasuring acquisition-related contingent consideration; intangible-asset amortization was $52.6 million for the nine months. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether recurring-license renewals, customer commitments and collections sustain revenue and cash-flow growth, especially given customer caution and the 10.5% customer concentration.
- Whether acquisition-related revenue and services justify the higher operating costs and amortization, and whether gross-margin pressure persists.
- The effect of the October 2011 credit-facility expiration and the availability and terms of any replacement facility.
- The location and practical availability of foreign cash, potential repatriation taxes, and resolution of open tax examinations and uncertain tax positions.
- The sustainability of repurchases: $335.0 million was spent in the first nine months, with $412.6 million remaining authorized at July 31.
- How actual results compare with management’s qualitative positive outlook; the filing provides no numerical forecast.