Synopsys, Inc. — FY2015 Form 10-K
Business context and reporting period. Synopsys provides electronic design automation software, semiconductor IP, systems and software-integrity products, manufacturing solutions, and related services. This annual report covers the 52-week fiscal year ended October 31, 2015; it is not a quarterly filing. The filing also reports fourth-quarter results for the three months ended October 31, 2015.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $2.242 billion | $2.057 billion | +9% |
| Gross margin | $1.723 billion; 76.8% | $1.601 billion; 77.8% | Margin down about 1.0 point |
| Operating income | $266.5 million | $248.7 million | +7% |
| Net income | $225.9 million | $259.1 million | -13% |
| Diluted EPS | $1.43 | $1.64 | -13% |
| Operating cash flow | $495.2 million | $551.0 million | -$55.8 million |
| Cash, cash equivalents and short-term investments | $964.9 million | $985.8 million | -$20.8 million |
| Debt at year-end | $205.0 million | $75.0 million | +$130.0 million |
| Working capital | -$14.6 million | $118.0 million | Down $132.5 million |
FY2015 revenue growth reflected organic growth and acquisitions. Time-based license revenue rose 5% to $1.792 billion and remained more than 90% of revenue when combined with other time-based revenue; upfront license revenue increased 45% to $197.3 million, mainly due to hardware sales. Maintenance and service revenue rose 14% to $252.7 million, driven by professional services, while maintenance revenue declined 6%.
Higher taxes were the principal reason net income fell despite higher revenue and operating income. The tax provision increased to $55.7 million from $13.0 million, including $33.0 million of tax expense related to integration of acquired technologies. FY2015 included $6.3 million of tax benefits from settlements and credits; FY2014 included $19.6 million of tax benefits from settlements.
In Q4 FY2015, revenue was $587.2 million versus $539.0 million in Q4 FY2014; net income was $49.8 million versus $62.5 million, and diluted EPS was $0.31 versus $0.39.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $836.2 million, with $128.7 million of short-term investments. The company reported $205.0 million of short-term debt: $45.0 million under its term loan and $160.0 million drawn on its revolving facility.
- Approximately 83.9% of worldwide cash, cash equivalents and short-term investments was held by international subsidiaries. Foreign earnings were considered indefinitely reinvested; repatriation could require additional U.S. taxes.
- Operating cash flow declined to $495.2 million. Investing activities used $559.6 million, including $340.2 million paid for acquisitions and intangible assets; financing activities used $62.1 million.
- Working capital turned negative, primarily reflecting higher short-term debt, lower cash, and increased deferred revenue. Management said existing cash, operating cash flow and available credit should meet routine needs for at least 12 months and the foreseeable future.
- Share repurchases totaled $260.0 million in FY2015. The board replenished the repurchase authorization to $500 million; that amount remained available at year-end.
Changes, outlook and material matters
- Total costs and operating expenses rose 9% to $1.976 billion, largely due to personnel costs, acquisitions, facilities, depreciation and acquired-intangible amortization. A $15.1 million restructuring charge related to a voluntary retirement and limited headcount-reduction program was paid during the year.
- Management described the business outlook as solid, citing technology leadership, customer relationships, expense management and acquisitions. It expects time-based revenue to remain approximately 90% of total revenue, while noting that portfolio expansion may increase revenue variability. The filing provides no specific numerical revenue or earnings guidance.
- Backlog was approximately $3.6 billion, up from $3.5 billion a year earlier; $1.7 billion was expected to be recognized after FY2016. The company cautioned that backlog is not a reliable predictor because customers may renegotiate, default or be affected by changing business and technology conditions.
- Synopsys disclosed unauthorized third-party access to its SolvNet customer license and product-delivery system, beginning in July 2015 and discovered in October. It reported no access to customer project or design data and did not expect a financial impact, but warned that future breaches could harm operations and reputation.
- In Mentor Graphics patent litigation, a jury assessed approximately $36 million in damages and a court enjoined certain ZeBu sales activities involving the features found to infringe. Synopsys released revised software and appealed; the company said it had accrued an immaterial loss-contingency amount and could not estimate any additional loss range.
- Other material risks include semiconductor-industry cyclicality and customer consolidation, competition, acquisition integration, international and currency exposure, cybersecurity, tax uncertainty, and dependence on key employees. One customer, Intel and subsidiaries, represented 12.8% of FY2015 revenue.
Important facts for investors to verify
- Whether growth in revenue and backlog converts into cash, particularly given declining operating cash flow, higher receivables, and increased days sales outstanding (60 days versus 55).
- The sustainability of earnings after the FY2015 increase in tax expense and the potential impact of tax audits, unrecognized tax benefits, and foreign-earnings repatriation.
- The outcome and financial exposure of Mentor litigation, including appeals and any effects of the ZeBu injunction.
- The scope, remediation and any subsequent consequences of the SolvNet security incident.
- Acquisition integration and returns, given $333.2 million of FY2015 acquisition consideration and rising goodwill, which reached $2.471 billion.
- Liquidity and capital allocation, including short-term debt repayment, overseas cash availability, and the pace of further buybacks.