Synopsys, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended July 31, 2021; comparisons are with the corresponding prior-year periods. Amounts below are in millions of U.S. dollars, except per-share data.
Business context
Synopsys supplies electronic design automation (EDA), semiconductor intellectual property (IP), system design and validation products, and software security and quality tools. Its reportable segments are Semiconductor & System Design and Software Integrity.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $1,057.1 | $964.1 | $3,051.8 | $2,659.8 |
| Gross margin | $852.1; 80.6% | $771.1; 80.0% | $2,424.7; 79.5% | $2,089.7; 78.6% |
| Operating income | $201.9 | $210.6 | $544.5 | $424.0 |
| Net income attributable to Synopsys | $198.6 | $252.9 | $556.1 | $466.9 |
| Diluted EPS | $1.27 | $1.62 | $3.54 | $3.01 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1,122.1 | $789.2 |
Q3 revenue rose 10%, led by Semiconductor & System Design revenue growth of 10%; Software Integrity revenue grew 5%. Time-based products increased 9% and maintenance and service revenue increased 33%, while upfront products revenue declined 4%. Q3 operating income fell 4% as expenses grew faster than revenue, including restructuring costs. For the nine months, revenue increased 15% and operating income increased 28%.
Q3 operating margin was approximately 19.1%, versus 21.8% a year earlier; nine-month operating margin was approximately 17.8%, versus 15.9%. Q3 net income was affected by lower gains on executive deferred compensation plan assets and a change from an income tax benefit to tax expense. The nine-month tax rates were 8.4% in 2021 and a benefit rate of 4.5% in 2020.
Cash, debt and liquidity
- At July 31, 2021, cash and cash equivalents were $1,385.4 and short-term investments were $144.8, totaling $1,530.2, up $294.5 from October 31, 2020.
- Nine-month cash flow: operating activities provided $1,122.1; investing activities used $385.9; financing activities used $589.4. Property and equipment purchases were $67.0. Stock repurchases used $538.1.
- Debt was approximately $107.2: $82.5 under the term loan and $24.8 under a China credit agreement. No amount was drawn on the $650 revolving facility. Term-loan principal was due by fiscal 2022; the company reported compliance with debt covenants.
- Management said available cash, operating cash generation and revolving-credit availability should meet routine business requirements for at least the next 12 months and the foreseeable future. Working capital was approximately $429.3.
Material changes, outlook and risks
- Operating expenses increased, particularly research and development, reflecting higher personnel costs associated with hiring and acquisitions. Stock-based compensation was $248.5 for the nine months, up from $170.2.
- A restructuring plan initiated in Q3 is expected to cost $42–$53 in total and be completed in Q1 FY2022. Q3 and nine-month charges were $15.1.
- Acquisitions completed in the nine months totaled $166.9, net of cash acquired; management described them as not material to the financial statements individually or in aggregate.
- No numerical earnings or revenue guidance is provided in the filing. Management reported limited COVID-19 disruption to date but noted uncertainty, including possible hardware supply-chain disruption and prior slower customer commitments in Software Integrity.
- Key business risks include reliance on semiconductor and electronics industry demand and a relatively small number of large customers; competition and technology changes; international trade and export restrictions; cybersecurity and intellectual-property risks; hardware supply constraints; and fluctuations from upfront IP and hardware sales and customer contract timing.
- The Hungarian tax dispute remains under appeal after an adverse administrative-court ruling in April 2021. The company had paid the disputed assessment and recorded the amounts as prepaid taxes; it filed another appeal in July 2021. Separately, it said a decrease in unrecognized tax benefits of $0–$48 was reasonably possible within 12 months, with timing and settlement uncertain.
- The June 2021 accelerated share repurchase totaled $175.0; $35.0 was settled in August 2021. Approximately $325.0 remained available under the repurchase program at quarter-end.
Important facts for investors to verify
- Whether revenue growth and renewals continue, and how much future revenue depends on upfront IP and hardware sales, customer drawdowns and contract timing.
- Whether Software Integrity can improve profitability: Q3 adjusted operating margin was 9%, down from 16% a year earlier; nine-month margin was 9%, down from 13%.
- Final restructuring costs and timing relative to the stated $42–$53 estimate.
- Developments in the Hungarian tax appeal and potential tax settlements, including the stated $0–$48 range of possible decrease in unrecognized tax benefits.
- Cash generation, debt maturities and the use of capital for repurchases and acquisitions; confirm the August settlement of the $35.0 ASR balance.
- Effects of COVID-19, semiconductor supply constraints, export restrictions and customer spending on operations and outlook.