Business context and reporting period
Synopsys, Inc. supplies electronic design automation (EDA) software, semiconductor intellectual property (IP), system-level tools, software quality and security products, and related services. This Form 10-K covers fiscal 2016, a 52-week year ended October 29, 2016 (presented as October 31); it is an annual filing, not a standalone quarterly filing. The filing also reports unaudited fourth-quarter results.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $2,422.5 million | $2,242.2 million | +8% |
| Gross profit / margin | $1,879.6 million / 77.6% | $1,723.3 million / 76.8% | Margin +0.8 percentage points |
| Operating income / margin | $317.4 million / 13.1% | $266.5 million / 11.9% | Operating income +19% |
| Net income / margin | $266.8 million / 11.0% | $225.9 million / 10.1% | +18% |
| Diluted EPS | $1.73 | $1.43 | +21% |
| Cash from operations | $586.6 million | $495.2 million | +$91.4 million |
FY 2016 revenue comprised $1,910.9 million of time-based products, $248.1 million of upfront products, and $263.5 million of maintenance and services. Time-based revenue was approximately 90% of total revenue under management’s broader definition, and time-based product revenue alone was 79%. Research and development expense was $856.7 million, up 10%; total cost of revenue and operating expenses increased 7% to $2,105.2 million.
At October 31, 2016, cash, cash equivalents and short-term investments totaled $1,117.3 million, compared with $964.9 million a year earlier. Approximately 85% was held by foreign subsidiaries. Accounts receivable was $438.9 million and DSO was 63 days, versus 60 days. Working capital was $2.0 million, improving from negative $109.6 million, largely reflecting higher cash and receivables, partly offset by increased deferred revenue. The company had $205.0 million outstanding on its $500 million revolving facility and no term-loan balance at year-end. Cash and investments less revolver debt equaled approximately $912.3 million. Operating cash flow was $586.6 million; investing activities used $142.7 million and financing activities used $306.9 million. Stock repurchases were $400 million.
Fourth-quarter FY 2016 revenue was $633.7 million, gross profit $491.5 million, net income $72.7 million and diluted EPS $0.47. In Q4 FY 2015, these were $587.2 million, $447.3 million, $49.8 million and $0.31, respectively.
Material changes versus the prior comparable period
- Revenue grew 8%, primarily from overall business growth, higher technology subscription license (TSL) revenue and hardware sales. Upfront product revenue rose 26%, mainly due to hardware sales; time-based product revenue rose 7%.
- Operating income increased 19%, with operating margin improving to 13.1% from 11.9%, despite higher personnel costs and acquisition-related headcount. R&D spending rose $80.5 million.
- Cash from operations increased 18%, driven primarily by higher collections. Cash used in investing fell substantially as acquisition and intangible-asset spending declined.
- Backlog was approximately $3.5 billion, slightly below $3.6 billion at the prior year-end, mainly due to timing of large multi-year renewals. The company expected $1.6 billion of backlog to be recognized after FY 2017.
- Intel and its subsidiaries represented 15.9% of FY 2016 revenue, up from 12.8% in FY 2015; no other customer exceeded 10%.
Outlook, risks, contingencies and unusual items
Management described the business outlook as solid, citing technology leadership, customer relationships, the time-based revenue model, expense management and acquisitions. It did not provide quantitative FY 2017 revenue or earnings guidance in the supplied filing text. Management expects time-based revenue to remain approximately 90% of revenue, while noting that growth in hardware and adjacent markets could increase revenue variability. Revenue recognition is often spread over multi-year contracts, so current-period results largely reflect sales efforts in prior periods.
- Tax dispute: Hungary’s tax authority proposed a $47 million assessment for fiscal years 2011–2013; Synopsys said it intends to contest it. Potential penalties of up to 50% of the tax, plus interest, were also noted.
- Patent litigation: A jury assessed approximately $36 million in damages against Synopsys in the Mentor Graphics ZeBu case, and an injunction restricts certain sales activities involving the features found to infringe. The company appealed; a redesigned ZeBu software version omits those features. Synopsys had accrued an immaterial amount and could not estimate additional potential losses. Separately, the Federal Circuit affirmed invalidation of certain Synopsys patents in October 2016.
- Cybersecurity: Synopsys disclosed unauthorized access to its SolvNet license and product delivery system, discovered in October 2015 and beginning in July 2015. It said customer project and design data, personal information and payment-card information were not accessed or stored on that system.
- Tax rate and earnings: FY 2016 results included a $20.7 million IRS settlement benefit and about $37.1 million from reinstatement of the federal research credit, partly offset by $37.5 million of tax expense related to integration of acquired technologies. The effective tax rate is exposed to geographic earnings mix, tax audits, tax-law changes and realization of tax credits.
- Capital and liquidity: About 85% of cash and short-term investments was offshore and considered indefinitely reinvested; repatriation could trigger additional U.S. taxes. After year-end, the company amended its credit agreement to provide a $650 million revolver and a new $150 million term loan; it received the term-loan funding in FY 2017 Q1.
- Other risks: The filing highlights customer concentration and industry consolidation, semiconductor-sector spending and design-start sensitivity, acquisition integration, intense competition, foreign currency exposure, hardware supplier and margin risks, and evolving software/security threats. The new revenue standard was scheduled to apply in FY 2019; management was evaluating its impact.
Important facts for investors to verify
- Review subsequent filings and disclosures for the outcome and financial effect of the Hungarian tax assessment and Mentor litigation.
- Assess customer concentration: Intel-related revenue reached 15.9%, while backlog declined slightly and is not guaranteed to convert to revenue on schedule.
- Track the quality and collection of receivables, deferred revenue, and the near-zero year-end working-capital balance.
- Confirm the impact of offshore cash restrictions and the post-year-end credit agreement and term-loan funding on net debt, interest expense and liquidity.
- Evaluate whether revenue growth and margin improvement persist as hardware sales, acquisition costs, R&D investment and share repurchases evolve.
- Monitor revenue-standard adoption, tax-credit realizability and the company’s cybersecurity controls and incident disclosures.