SNPS

Business Context and Reporting Period

Company: Synopsys, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 3, 1999 (Second Quarter of Fiscal 1999)
Business Overview: Synopsys is a leading supplier of electronic design automation (EDA) solutions, providing design technologies for integrated circuits and electronic systems, along with consulting and support services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 11.8% year-over-year for the quarter and 7.6% for the six-month period, driven by higher license revenue and growth in training and consulting services.
• Profitability: Net income rose 5.7% for the quarter and 260% for the six-month period compared to the prior year. The significant six-month increase is largely due to the absence of merger-related and in-process R&D charges that impacted the prior year's results.
• Acquisitions: The company acquired Gambit Automated Design, Smartech OY, and CoverMeter rights for a combined $51.6 million. Approximately $16.3 million was charged to operations as in-process research and development (IPRD).
• Expense Management: Sales and marketing expenses decreased as a percentage of revenue (30.7% vs. 33.7% prior year) due to cost reductions from aligning Viewlogic operations. R&D expenses increased in absolute dollars but decreased as a percentage of revenue.
• International Revenue: International revenue increased to 41.3% of total revenue for the quarter, up from 37.4% in the prior year, primarily due to increased European sales, partially offset by weakness in Asian markets.

Outlook, Risks, and Management Commentary

• Liquidity: Management believes current cash, investments, and lines of credit ($70 million available) are sufficient to meet working capital and capital expenditure needs for at least the next 12 months.
• Year 2000 Readiness: The company estimates total Year 2000 remediation costs will not exceed $8.1 million, with $1.8 million incurred to date. 99% of products have been tested with no significant date-related failures found.
• Market Risks:
  • Competition: Intense competition from Cadence, Mentor, and Avant!, particularly regarding "design flows" and aggressive discounting on synthesis products.
  • Economic Conditions: Continued weakness in Asian economies (specifically Japan and Korea) poses a risk to future orders and revenue.
  • Customer Concentration: A significant portion of business is attributable to large customers; delays in large orders can materially impact quarterly results.
• Accounting Changes: The company adopted SOP 98-1 for internal software costs. Future adoption of SOP 98-9 (Software Revenue Recognition) is expected in fiscal 2000, though management intends to modify its business model to minimize impact.

Investor Verification Checklist

• Acquisition Integration: Verify the successful integration of Gambit and Everest and the realization of expected synergies from physical design tools.
• Asian Market Exposure: Monitor the impact of economic conditions in Japan and Korea on future order intake, given international revenue comprises over 40% of total revenue.
• Year 2000 Costs: Track actual Year 2000 remediation expenses against the $8.1 million estimate to ensure no material overruns.
• Revenue Recognition: Review the timing of revenue recognition, particularly for large orders and deferred revenue, as the company notes a disproportionate volume of orders in the last week of the quarter.
• Non-Synthesis Growth: Assess growth rates of non-synthesis products (e.g., PrimeTime, VCS) as the company states synthesis revenue growth is expected to slow.