Synopsys, Inc. — Q3 FY2010 Form 10-Q
Reporting period: Quarter ended July 31, 2010; year-to-date figures cover the nine months ended that date. Amounts below are in millions of dollars except per-share data. Synopsys provides electronic design automation software, intellectual property and services for semiconductor design, verification and manufacturing.
Financial performance
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Revenue | $336.9 | $345.2 | $1,005.2 | $1,021.8 |
| Gross profit (margin) | $270.2 (80.2%) | $275.1 (79.7%) | $803.9 (80.0%) | $821.3 (80.4%) |
| Operating income (margin) | $50.8 (15.1%) | $61.1 (17.7%) | $150.9 (15.0%) | $183.3 (17.9%) |
| Net income | $39.3 | $47.4 | $211.7 | $148.2 |
| Diluted EPS | $0.26 | $0.32 | $1.40 | $1.02 |
- Q3 revenue fell 2% year over year, mainly on lower maintenance and services revenue; time-based license revenue was nearly flat. Maintenance and services declined 15% in the quarter, including lower professional services demand and fewer large contracts completed.
- Q3 net income declined 17%. Higher sales and marketing expense, including variable compensation, and lower other income contributed to the decrease; a lower tax provision partly offset it.
- Nine-month net income rose despite lower revenue and operating income, principally because of a $52.7 million income-tax benefit. The reported nine-month effective tax rate was negative 33.2%, reflecting the IRS settlement and related tax adjustments; this is not a measure of recurring operating performance.
- Recurring time-based license revenue was 85% of Q3 revenue. Management said more than 90% of quarterly revenue is typically committed before the quarter begins, with contracts averaging about three years.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $244.1, up from $175.2 a year earlier. Management attributed the increase mainly to customer billing and collection timing, lower bonus and commission payments, and lower vendor payments.
- Cash and short-term investments totaled $1,209.8 at July 31, versus $1,168.3 at October 31, 2009. Cash and cash equivalents were $883.4; short-term investments were $326.4. Net working capital was $658.9.
- Nine-month investing cash flow was an outflow of $24.8, including $137.7 paid for acquisitions and intangible assets, net of cash acquired. Financing cash flow was an outflow of $41.6, including $125.3 of share repurchases.
- No borrowings were outstanding under the $300 million revolving credit facility, which matures October 2011; the company reported compliance with its covenants. The filing reports no material debt balance, though it does report capital-lease payments.
- Accounts receivable increased to $148.6 from $127.0, and days sales outstanding rose to 40 from 34 at fiscal year-end. The company held $625.4 of cash, cash equivalents and short-term investments in foreign accounts and considered relevant foreign earnings indefinitely reinvested.
Material changes, outlook and risks
- Revenue declined 2% in both the quarter and nine-month period. Nine-month time-based license revenue decreased $12.9; maintenance and services decreased $5.3. Research and development expense increased 5% year to date, and sales and marketing expense increased 2%.
- Acquisitions during the first nine months had preliminary purchase consideration of $146.9, including $66.4 of goodwill and $51.5 of identifiable intangible assets. A further $10.0 of contingent consideration is payable upon technology milestones; its acquisition-date fair value was $7.8.
- After quarter-end, on September 2, 2010, Synopsys acquired Virage Logic for approximately $312 million. Management stated that cash, operating cash generation and available credit should meet business requirements for at least 12 months, but the filing does not provide quantified earnings or revenue guidance.
- Management described the outlook as positive but remained cautious about the strength and durability of the recovery. Customers remained cost-conscious, and the company said it would monitor market conditions and continue to pursue organic growth and acquisitions.
- Principal risks include uncertain global and semiconductor-market conditions, customer spending and payment delays, competition and pricing pressure, customer and industry consolidation, acquisition integration and execution, tax uncertainty, foreign-exchange exposure, investment impairment, and intellectual-property litigation. One customer represented more than 10% of revenue; the customer is not identified in the provided filing text.
- The company was defending customers against a patent claim by a Japanese electronics company, which it said it believed was without merit. Routine legal proceedings and other claims could still adversely affect results. The filing also notes ongoing IRS and other tax examinations; possible reductions in unrecognized tax benefits over the next 12 months were estimated at $0–$20 million.
- Disclosure controls were assessed as effective as of July 31, 2010, and no material change in internal control over financial reporting was reported during the quarter.
Investor verification points
- Separate recurring operating trends from the substantial one-time tax benefit driving year-to-date net income.
- Track renewals, customer spending and payment terms, given weaker services revenue, higher receivables and increased days sales outstanding.
- Assess the cash and financing impact, integration costs and expected contribution of the post-quarter Virage Logic acquisition.
- Monitor acquisition-related goodwill, intangible amortization and contingent consideration, as well as progress on the IRS audit and other uncertain tax positions.
- Review customer concentration and the status and potential exposure of the patent litigation and other legal matters.