Synopsys, Inc. — Q1 FY2011 Form 10-Q
Business context and reporting period
Synopsys provides electronic design automation software, semiconductor IP, hardware, and related services. The quarter ended January 31, 2011 for financial statement presentation; the company’s fiscal quarter ended January 29, 2011. Comparisons are with Q1 FY2010.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $364.6 million | $330.2 million | +10% |
| Gross margin | $280.3 million; 76.9% | $264.6 million; 80.1% | Margin down 3.2 points |
| Operating income | $46.7 million; 12.8% margin | $55.1 million; 16.7% margin | Down 15% |
| Net income | $48.2 million | $132.8 million | Down 64% |
| Diluted EPS | $0.31 | $0.88 | Down $0.57 |
| Cash from operations | $(39.6) million | $(45.4) million | Cash used decreased $5.8 million |
- Revenue mix: time-based licenses $295.6 million (+8%); upfront licenses $26.5 million (+30%); maintenance and services $42.5 million (+14%). Time-based licenses were 81% of revenue.
- Expense growth outpaced revenue: cost of revenue rose 29% to $84.3 million and operating expenses rose 12% to $233.7 million. Higher acquisition-related headcount and intangible amortization were important drivers; R&D increased 19% to $120.7 million.
- Other income was $5.7 million versus $2.3 million, including foreign-exchange gains and higher income on deferred compensation plan assets; it also included a $0.9 million investment impairment.
- Cash, cash equivalents, and short-term investments totaled $867.1 million at January 31, down from $938.6 million at October 31, 2010. Working capital was $409.2 million, up from $326.0 million.
- Investing activities used $18.6 million and financing activities used $13.2 million. Share repurchases were $65.0 million; stock issuance proceeds were $52.5 million.
- No borrowings were outstanding under the $300 million revolving credit facility, and the company reported compliance with its covenants. The facility was scheduled to terminate October 20, 2011.
Material changes and unusual items
- Net income fell mainly because Q1 FY2010 included a one-time tax benefit from an IRS settlement; management attributed the year-over-year decline to a $91.6 million benefit in the prior-year quarter. Q1 FY2011’s tax provision was $4.1 million, an effective rate of 7.8%, versus a $75.4 million tax benefit in Q1 FY2010.
- Revenue growth reflected overall expansion and products from prior-year acquisitions. The company completed eight acquisitions in FY2010 for approximately $500.8 million net cash consideration; related staffing and acquired-intangible amortization contributed to higher costs.
- Revenue from one customer was 10.9% of consolidated revenue, compared with 11.1% a year earlier.
Outlook, risks, and contingencies
- No numerical quarterly or full-year earnings or revenue guidance is provided in the supplied filing text. Management described its business outlook as positive, citing semiconductor-industry growth expectations for 2011, strong customer relationships, expense management, and acquisitions. It expected industry growth to be slower than in 2010.
- Management cautioned that customers remained cost-conscious and that macroeconomic uncertainty, semiconductor-industry cyclicality, and customer spending decisions could affect demand. More than 90% of revenue is recurring, and the company typically enters a quarter with more than 90% of that quarter’s revenue committed; revenue recognition may lag changes in customer spending.
- Risks include competition and industry/customer consolidation, acquisition integration and impairment risk, dependence on major customers, customer payment defaults, foreign exchange movements, international operations, tax changes and audits, and product or intellectual-property claims.
- The company was defending customers against a patent-infringement claim brought by a Japanese electronics company; it said it believed the claim lacked merit. Routine legal proceedings and other claims also remain possible.
- The IRS was auditing fiscal years 2006–2009. The filing said it was reasonably possible before fiscal year-end that certain tax statutes would expire and the IRS examination would be settled; the estimated potential decrease in unrecognized tax benefits ranged from $0 to $102 million, with timing and settlement outcomes uncertain.
- Management believed available cash, investments, operating cash generation, and credit availability would meet business requirements for at least the next 12 months. It noted that $578.9 million of cash, cash equivalents, and short-term investments was held in foreign accounts and considered indefinitely reinvested to the extent of indefinitely reinvested foreign earnings.
Important facts for investors to verify
- Whether revenue growth continues and whether acquisition-related costs moderate enough to stabilize gross and operating margins.
- How recurring-license bookings, renewals, customer commitments, and collections translate into future revenue and operating cash flow.
- The outcome and cash or earnings effects of IRS examinations and other uncertain tax positions.
- Integration progress and returns from recent acquisitions, including the sustainability of acquired-product revenue.
- Renewal or replacement of the revolving credit facility before its October 2011 termination date.