Synopsys, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended April 30, 2016; comparisons are with the corresponding 2015 periods. Synopsys supplies electronic design automation software, semiconductor IP, hardware and related services, as well as software quality and security tools.
Financial performance
Amounts are in millions, except per-share data and percentages. Margin percentages are calculated from reported figures.
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $605.0 | $557.2 | $1,173.6 | $1,099.2 |
| Gross margin | $473.4; 78.2% | $432.2; 77.6% | $912.5; 77.8% | $849.6; 77.3% |
| Operating income; margin | $86.8; 14.3% | $75.9; 13.6% | $157.9; 13.5% | $147.4; 13.4% |
| Net income; diluted EPS | $69.4; $0.45 | $55.6; $0.35 | $129.4; $0.84 | $120.8; $0.77 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $187.3 | $67.7 |
- Q2 revenue mix: Time-based licenses $484.2 million (+8% year over year); upfront licenses $58.2 million (+31%); maintenance and services $62.7 million (-4%). Time-based license revenue was 80% of revenue.
- Six-month cash flows: Investing activities used $78.7 million, versus $184.3 million in the prior-year period. Financing activities used $118.8 million, versus $18.5 million provided a year earlier.
- Liquidity at April 30: Cash, cash equivalents and short-term investments totaled $959.9 million, down $5.0 million from October 31, 2015. Current liabilities exceeded current assets by $82.0 million. Management stated available cash, operating cash flow and credit availability should meet routine needs for at least 12 months.
- Debt: $250.0 million outstanding at quarter-end ($220.0 million revolver and $30.0 million term loan), classified as short-term. The company reported covenant compliance. After quarter-end, it drew another $125.0 million; revolver borrowings totaled $335.0 million as of May 24.
Changes and management commentary
- Q2 revenue rose 9% and net income rose 25% year over year. Management attributed revenue growth mainly to higher time-based license revenue from prior-period arrangements, increased hardware sales and acquisitions; professional services revenue declined.
- For the first half, revenue increased 7%. Operating expenses grew 7%, with R&D expense up 12%, primarily reflecting higher headcount, including acquisitions. Q2 total costs and operating expenses increased 8%.
- The six-month effective tax rate fell to 19.9% from 24.7%, mainly reflecting the reinstated federal research credit and amended cost-sharing arrangements; Q2 rates were 28.6% and 33.7%, respectively.
- Operating cash flow improved substantially, with management citing higher collections. Accounts receivable fell $86.6 million from fiscal year-end and DSO declined from 60 to 45 days.
Outlook, risks and unusual items
- Management described the business outlook as solid, citing technology, customer relationships, the time-based revenue model, expense management and acquisitions. The filing gives no numerical revenue or earnings guidance. Management expects time-based revenue to remain approximately 90% of total revenue; it was more than 90% in the period under discussion when including maintenance and services.
- Revenue is substantially recognized over contract terms, typically about three years, so current results largely reflect prior-period sales activity. Hardware sales and upfront license mix can add variability.
- Fiscal 2016 acquisitions had aggregate consideration of $40.4 million, net of cash acquired; preliminary purchase accounting remains subject to adjustment. The company recorded $3.0 million in six-month restructuring charges and expected related payments to be completed by fiscal year-end.
- In May, Synopsys entered a $125 million accelerated share repurchase agreement. It had spent $200 million on repurchases during the six months and had $300 million authorized for further repurchases at April 30.
- Litigation: A jury assessed approximately $36 million in damages in Mentor Graphics patent litigation, and an injunction restricts certain sales activity involving features found to infringe. Synopsys appealed; the filing states the appeal hearing was scheduled for June 9, 2016. The Japan IP High Court separately affirmed a favorable non-infringement ruling.
- Other exposures: One customer and its subsidiaries generated 14.5% of Q2 revenue. Gross unrecognized tax benefits were $112.1 million; the company said a potential decrease over the next 12 months could range from $0 to $20 million. Risks include semiconductor-industry demand and consolidation, competition, acquisition integration, foreign exchange and tax uncertainty, cybersecurity, and product/IP litigation. The filing also disclosed unauthorized access to its SolvNet system discovered in October 2015; it said no customer project or design data was accessed and did not expect a financial impact.
Important facts for investors to verify
- Whether revenue growth and margins are sustained as hardware and upfront-license activity fluctuate and professional services remain weaker.
- Cash generation and liquidity after the post-quarter revolver draw, May share repurchase and upcoming debt repayment requirements.
- Developments in the Mentor litigation, including appeal outcomes, injunction implications and any resulting financial exposure.
- Acquisition performance, integration costs and final purchase accounting, along with the trajectory of R&D and other personnel costs.
- Tax-audit outcomes, unrecognized tax benefits, customer concentration and any further cybersecurity developments.