Synopsys, Inc. — Q2 FY2011 Form 10-Q
Reporting period: Fiscal quarter ended April 30, 2011; comparisons are with the quarter ended May 1, 2010. Six-month figures compare periods ended April 30, 2011 and 2010. Synopsys provides electronic design automation software, semiconductor IP, related hardware, and technical services.
Financial performance
- Q2 revenue: $393.7 million, up 16% from $338.1 million. Time-based license revenue was $318.8 million (+10%); upfront license revenue $25.0 million (+97%); maintenance and service revenue $49.9 million (+36%).
- Q2 earnings: Gross margin was $307.6 million, or approximately 78.2% of revenue, versus $269.1 million, or 79.6%. Operating income was $51.7 million (13.1% margin), compared with $45.0 million (13.3%). Net income was $81.1 million versus $39.5 million; diluted EPS was $0.53 versus $0.26.
- Six-month results: Revenue was $758.3 million, up 13%. Operating income was $98.3 million versus $100.1 million; net income was $129.3 million versus $172.3 million. Diluted EPS was $0.84 versus $1.14. Gross margin was approximately 77.5% versus 79.9%; operating margin approximately 13.0% versus 15.0%.
- Cash flow: For the first six months, operating cash flow was $56.9 million, up from $36.2 million. Investing used $11.4 million, compared with $89.2 million; financing used $127.5 million, versus $21.6 million provided. Cash and cash equivalents declined $81.4 million to $694.0 million.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled $840.5 million at April 30, down 10% from October 31, 2010. Working capital was $398.8 million, up from $326.0 million. No borrowings were outstanding under the $300 million revolving facility, and Synopsys reported covenant compliance; the facility was due to terminate October 20, 2011.
- Capital and balance sheet: Total liabilities were $1.06 billion and stockholders’ equity $2.15 billion. The company repurchased $235.0 million of stock during the first six months; $80.3 million remained authorized at April 30. The board replenished the program to $500 million on May 25, 2011.
Changes, outlook, and notable items
- Management attributed revenue growth to overall business growth, prior-year acquisitions, contract renewals, and increased professional-services activity. Asia-Pacific and other revenue rose to $89.2 million in Q2 from $65.5 million; Japan revenue was $71.7 million versus $61.9 million.
- Q2 net income benefited from a $32.8 million tax benefit arising from a final IRS settlement covering fiscal years 2006–2009. Without the settlement, management said the effective tax rates would have been 15.6% for Q2 and 11.9% for the first six months. The prior-year six-month comparison included a large tax benefit from an earlier IRS settlement, contributing to lower FY2011 year-to-date net income.
- Costs rose with acquisition-related headcount, services activity, and intangible-asset amortization. Sales and marketing expense also reflected higher variable compensation. A $3.2 million reduction in contingent-consideration fair value lowered Q2 R&D expense. A $1.0 million investment impairment was recorded in the first six months.
- Management described its outlook as positive, citing expected semiconductor-industry growth, technology, customer relationships, expense management, and acquisitions. It said industry growth in 2011 was expected to be slower than in 2010; customers remained cost-conscious amid economic uncertainty. More than 90% of revenue was recurring, and the company typically entered quarters with more than 90% of that quarter’s revenue committed. No specific revenue or EPS guidance was provided in the filing text.
- Management expected existing cash, investments, and operating cash generation to meet business requirements for at least 12 months. $614.1 million of cash, cash equivalents, and short-term investments was held in foreign subsidiaries and considered indefinitely reinvested; repatriation could require additional U.S. taxes.
- Principal risks include semiconductor-industry cyclicality and customer R&D budgets, competition, acquisition integration and amortization, customer concentration and payment defaults, foreign-exchange exposure, tax uncertainty, intellectual-property claims, and operational disruption. One customer contributed 10.1% of Q2 revenue. Routine legal proceedings were disclosed; outcomes are uncertain. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of Q2 and year-to-date earnings growth or decline reflects the IRS settlements, and what are normalized tax rates and earnings?
- Whether recurring-license growth, renewal activity, and acquisition-related revenue continue, particularly as industry growth moderates.
- Whether higher acquisition-related costs and amortization constrain margins, and whether acquired products deliver expected growth.
- Cash conversion, receivables and DSO (49 days versus 44 at October 31), foreign cash and potential repatriation taxes, and the timing of tax payments.
- Status and terms of the revolving credit facility as its October 2011 termination approached, and the effect of continued share repurchases on liquidity.
- Exposure to customer concentration, industry spending changes, foreign currencies, tax audits, and any material developments in legal proceedings.