Synopsys, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Quarter presented as ended April 30, 2012; the company states the fiscal quarter actually ended May 5. Dollar figures below are in millions except per-share data. Comparisons are with the prior-year period.
Business context
Synopsys supplies electronic design automation software, chip intellectual property, hardware and related services. Its recurring-revenue model produces more than 90% of revenue from time-based licenses, maintenance and services. On February 22, 2012, Synopsys completed its acquisition of Magma Design Automation for approximately $550.2 million in total consideration.
Financial performance
| Metric | Three months ended April 30, 2012 | Prior-year quarter | Six months ended April 30, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $432.6 | $393.7 | $858.1 | $758.3 |
| Gross profit | $332.1 | $307.6 | $667.7 | $588.0 |
| Gross margin | 76.8% | 78.2% | 77.8% | 77.5% |
| Operating income | $17.1 | $51.7 | $87.1 | $98.3 |
| Net income | $21.0 | $81.1 | $77.7 | $129.3 |
| Diluted EPS | $0.14 | $0.53 | $0.52 | $0.84 |
- Quarterly revenue rose 10%, led by time-based license revenue, up 14% to $363.6 million. Upfront license revenue declined 11% to $22.3 million, and maintenance and service revenue declined 7% to $46.6 million.
- Quarterly operating expenses, including cost of revenue, increased 21% to $415.4 million. Research and development rose 23% to $151.2 million; general and administrative rose 69% to $49.9 million. Management attributed much of the increase to acquired headcount, acquisition-related costs and acquired-asset amortization.
- Quarterly operating margin was approximately 4.0%, versus 13.1% a year earlier; net margin was approximately 4.8%, versus 20.6%. The company cited acquisition-related costs and the absence of the prior-year IRS settlement tax benefit as primary reasons for the net income decline.
- For the six months, revenue increased 13% and time-based license revenue increased 17%. The comparison includes an extra fiscal week in 2012, which added approximately $26 million of revenue and $16 million of expenses.
Cash flow, liquidity and debt
- Six-month operating cash flow was $87.5 million, versus $56.9 million. Investing cash flow was $(437.7) million, primarily reflecting $564.5 million of cash paid for acquisitions and intangible assets, net of cash acquired. Financing cash flow was $298.1 million, including $250 million of credit-facility and term-loan proceeds.
- Cash and cash equivalents were $796.6 million at April 30, 2012, down from $855.1 million at October 31, 2011. Short-term investments fell from $149.0 million to zero after the portfolio was liquidated. Approximately $649.3 million of cash was held in foreign subsidiaries; repatriation could require additional U.S. taxes if not previously accrued.
- Working capital was $100.3 million, down from $327.8 million at fiscal year-end. Accounts receivable was $236.3 million; days sales outstanding increased to 50 from 47.
- Debt was $250 million: $100 million drawn on a $350 million revolving facility and $150 million under a $150 million term loan. The facilities mature in October 2016; the company reported covenant compliance. Rates are floating, and term-loan installments begin in Q3 FY2012.
- Management stated that cash, cash equivalents and cash generated from operations should meet routine business requirements for at least the next 12 months.
Outlook, risks and unusual items
- Management described the business outlook as strong, citing recurring revenue, customer relationships, expense management, demand for mobile devices and expanded offerings from acquisitions. The filing provides no specific revenue or earnings guidance.
- Management said the company generally enters each quarter with more than 90% of that quarter’s revenue committed. Results nevertheless depend on customer spending, contract renewals, payment terms and the mix of time-based versus upfront licenses.
- Magma-related acquisition costs were $30.2 million in the quarter and $31.8 million for the six months. Magma contributed $13.5 million of revenue after its acquisition date. The purchase-price allocation remained preliminary; $303.5 million of Magma goodwill was recorded and is not tax-deductible.
- The 2012 effective tax rate was 10.7% for the quarter and 20.2% for the six months, compared with tax benefits in the corresponding 2011 periods. The prior-year benefit included a $32.8 million net benefit from an IRS settlement. Hungarian tax settlements disclosed after quarter-end were expected to require future cash payments of $14.6 million, without a material income-tax expense effect.
- Key risks include semiconductor-industry and customer-spending weakness, competition, acquisition integration and impairment risk, customer concentration and payment defaults, foreign currency and international operating exposures, tax examinations, and intellectual-property claims. One customer represented about 10% of quarterly revenue. A Dynetix patent-infringement suit seeks damages and an injunction; the Magma shareholder suits had a proposed settlement subject to court approval.
- Disclosure controls were assessed as effective at providing reasonable assurance; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether Magma integration delivers expected revenue growth and synergies, and whether the preliminary purchase-price allocation changes.
- How much of quarterly revenue growth reflects underlying demand versus acquisition contribution and the extra fiscal week in the first half.
- Whether operating profitability improves as acquisition costs and increased amortization affect results.
- Cash availability in the United States, potential tax costs of repatriation, debt repayment progress and compliance with credit-facility covenants.
- Developments in tax audits and settlements, the Dynetix litigation and approval of the proposed Magma-lawsuit settlement.