Synopsys, Inc. — FY2019 Form 10-K
Business context and period. Synopsys provides electronic design automation (EDA), semiconductor IP and system integration products, and software security and quality tools. This annual report covers fiscal 2019, a 52-week year ended November 2, 2019 (dates in the statements are presented as October 31). Fiscal 2018 was a 53-week year. The filing also reports fourth-quarter results.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $3.361 billion | $3.121 billion |
| Gross margin | $2.608 billion; 77.6% | $2.385 billion; 76.4% |
| Operating income | $520.2 million; 15.5% margin | $360.2 million; 11.5% margin |
| Net income | $532.4 million | $432.5 million |
| Diluted EPS | $3.45 | $2.82 |
| Cash from operations | $800.5 million | $424.4 million |
| Cash and cash equivalents | $728.6 million | $723.1 million |
| Total debt at year-end | $137.7 million | $469.3 million |
- Revenue rose 8%. Semiconductor & System Design revenue grew 7% to $3.026 billion; Software Integrity revenue grew 19% to $334.6 million. Software Integrity reported adjusted operating income of $32.2 million, versus a $10.6 million loss in FY2018.
- Revenue mix shifted: time-based products revenue fell 5% to $2.198 billion, while upfront products revenue increased 73% to $619.8 million, primarily reflecting higher IP sales and revenue timing.
- Net income included a low 2.4% effective tax rate. Operating cash flow increased substantially, partly due to higher net income and collections. Investing used $235.9 million; financing used $561.9 million, including $329.2 million for share repurchases.
- Working capital was negative $13.6 million, improved from negative $558.6 million, principally as short-term debt declined. The company reported compliance with credit-facility financial covenants and stated that cash, operating cash flow and available revolving credit should meet routine requirements for at least 12 months.
Material changes and comparability
- FY2019 adopted ASC 606 using the modified retrospective method; prior-year results were not restated. On an ASC 605 pro forma basis, FY2019 revenue would have been $3.258 billion, net income $444.2 million and diluted EPS $2.88, versus reported ASC 606 figures of $3.361 billion, $532.4 million and $3.45. The filing says adoption did not affect cash flows.
- Management attributed approximately $102.5 million of higher reported FY2019 revenue to the new revenue standard, while FY2018 benefited from an extra week that contributed approximately $46 million of revenue. These factors limit direct year-over-year comparisons.
- Operating income increased 44%, while total cost of revenue and operating expenses rose 3%. FY2019 included $47.2 million in restructuring charges; the company expects total charges under the plan to be $56–$65 million, with completion anticipated by the second quarter of FY2020.
- Quarter four revenue was $851.1 million, net income $160.7 million and diluted EPS $1.04.
Outlook, commentary, risks and unusual items
- The filing provides no specific FY2020 revenue or earnings guidance. Management described continued growth strategies in EDA, IP and software security and quality, while warning that upfront IP and hardware sales and the revenue-accounting change increase period-to-period variability.
- Remaining performance obligations were approximately $4.4 billion at year-end, including $494.3 million of non-cancellable flexible-spending commitments for which customers had yet to select specific products or services. Excluding those commitments, 56% was expected to be recognized over the next 12 months.
- Intel and subsidiaries accounted for 12.8% of FY2019 revenue, down from 15.4% in FY2018. Customer concentration and consolidation could affect renewals, spending and bargaining power.
- Trade restrictions are a material risk: U.S. Entity List restrictions beginning in May 2019 prevented new business with certain entities and placed related revenue on hold. Other disclosed risks include semiconductor-sector demand, global economic and currency volatility, cybersecurity, competition, acquisition integration, and dependence on key employees and suppliers.
- Tax results included a $17.4 million expense following an adverse Hungarian court ruling; the company appealed to Hungary’s Supreme Court. Gross unrecognized tax benefits were $116.2 million at year-end. FY2019 tax results also reflected research credits, foreign-derived intangible income and stock-compensation tax benefits.
- After year-end, the company drew $160 million under its revolving facility by December 20, 2019, and entered a $100 million accelerated share repurchase agreement. A prior Mentor patent settlement cost $65 million in FY2018; a related agreement could require a further termination charge of up to $25 million under specified conditions.
- Contractual obligations totaled approximately $1.158 billion, including $622.6 million of operating lease payments and $383.3 million of purchase obligations. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Compare FY2019 growth and margins on a consistent revenue-accounting basis, including the ASC 605 pro forma figures and FY2018’s extra week.
- Assess how sustainable earnings are given the 2.4% effective tax rate, tax credits, open tax positions and the Hungarian appeal.
- Track the timing and conversion of remaining performance obligations, including customer selection of flexible-spending commitments and the concentration of revenue among large customers.
- Review cash generation and capital allocation alongside debt, subsequent revolver borrowing, share repurchases, restructuring costs and long-term lease commitments.
- Monitor trade restrictions affecting customers, demand in semiconductor markets, and execution and profitability in Software Integrity.