Business context and reporting period
Synopsys, Inc. provides electronic design automation (EDA), semiconductor intellectual property, system validation, and software security and quality products and services. This Form 10-Q covers fiscal Q1 2019, presented as the quarter ended January 31, 2019; the quarter included 13 weeks, compared with 14 weeks in fiscal Q1 2018. Fiscal 2019 also marks the adoption of ASC 606 revenue accounting and separate reporting of Semiconductor & System Design and Software Integrity segments.
Financial performance and liquidity
Unless stated otherwise, amounts are in millions of dollars. Results are unaudited.
| Metric | Fiscal Q1 2019 | Fiscal Q1 2018 |
|---|---|---|
| Revenue | $820.4 | $769.4 |
| Gross profit / margin | $627.5 / 76.5% | $588.3 / 76.5% |
| Operating income / margin | $147.4 / 18.0% | $107.7 / 14.0% |
| Net income (loss) | $153.5 | $(3.7) |
| Diluted earnings (loss) per share | $1.01 | $(0.02) |
| Operating cash flow | $(144.0) | $(59.1) |
| Investing cash flow | $(29.7) | $(625.0) |
| Financing cash flow | $38.1 | $230.4 |
Cash and cash equivalents were $592.3 at January 31, down $130.8 from October 31, 2018. Current assets were $1,797.6 and current liabilities $2,025.6, a working capital deficit of $228.0. Balance-sheet debt totaled approximately $541.9, including $400.0 outstanding on the revolving facility; the company also had $10.8 outstanding under a China credit agreement. It reported compliance with credit-facility covenants. Approximately $453.1 of cash was held in foreign subsidiaries.
Segment revenue was $737.9 for Semiconductor & System Design (up 5%) and $82.5 for Software Integrity (up 29%). Segment adjusted operating margins were 26% and 7%, respectively; Software Integrity had a $3.2 adjusted operating loss in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue increased $51.0, or 7%, despite the prior-year quarter’s extra week, which management estimates added approximately $46 of revenue. Growth reflected business expansion and acquisitions; reported comparisons are also affected by ASC 606.
- ASC 606 adoption increased current-quarter reported net income by $27.9 versus the company’s ASC 605 pro forma presentation. Under ASC 605, Q1 2019 revenue would have been $798.1 and net income $125.7. The adoption did not affect cash flows.
- Operating income rose 37%. Management cited business growth and an $18.3 legal settlement benefit in general and administrative expense, partly offset by higher employee-related costs. The prior-year quarter also included substantial Tax Act-related tax expense.
- Operating cash use increased by $84.9 year over year, mainly due to billing and collection timing, higher annual variable compensation payouts, and vendor disbursements. Investing cash use fell sharply because the prior-year period included $608.3 of acquisition payments.
- Revenue mix shifted: time-based products revenue declined 3% to $553.7, upfront products revenue increased 42% to $130.5, and maintenance and service revenue increased 27% to $136.2. ASC 606 changed the timing and classification of some revenue and commission expense.
Outlook, commentary, risks and unusual items
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects approximately 80%–85% of non-hardware revenue to be time-based and believes cash, operating cash generation, and available revolving credit will meet routine needs for at least the next 12 months.
- Management cautions that revenue can vary with IP and hardware shipments, royalties, customer renewals and payment terms, project timing, and ASC 606. It also identifies dependence on semiconductor and electronics demand, large customers, competition, acquisitions, international operations, cybersecurity, and foreign exchange as significant risks.
- The effective tax rate was a benefit of 4.4%, including a $22.8 benefit related to Hungarian tax guidance on an intangible-asset transfer and $5.5 of previously unrecognized Taiwanese tax benefits. Tax outcomes remain uncertain; the company estimated possible decreases in unrecognized tax benefits of $0–$21 over the coming 12 months.
- The company continues to contest a Hungarian tax assessment; the remaining disputed amount was approximately $25.0 plus $11.0 of interest and penalties, which had been paid while the appeal proceeded. A hearing was scheduled for February 26, 2019.
- The filing describes an $18.0 payment from Ubiquiti to Synopsys under a January 2019 resolution, and a separate Mentor interoperability agreement with a possible one-time termination charge of up to $25.0 under specified conditions. Goodwill testing following the segment realignment found no impairment.
- Adoption of the new lease standard is expected to have a material impact on the balance sheet when implemented in fiscal 2020. The filing also notes proposed tax regulations that could affect tax benefits and remain subject to change.
Important facts for investors to verify
- Assess underlying growth after accounting for the prior-year extra week and the effects of ASC 606; the filing provides an ASC 605 pro forma comparison for Q1 2019.
- Monitor operating cash flow, receivables and collections, given the quarter’s $144.0 operating cash use and $208.1 increase in receivables from October 31.
- Review debt and liquidity: $400.0 was drawn on the revolver, the working capital deficit was $228.0, and a significant share of cash was held internationally.
- Track tax matters, including the Hungarian appeal, tax-audit settlements, and the impact of evolving Tax Act regulations.
- Check subsequent filings for the status of the contingent Mentor charge, customer concentration, and any changes to business outlook or material risks.