Synopsys, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 31, 2015; comparable period ended February 1, 2014. Synopsys provides electronic design automation (EDA) software, semiconductor IP, related services and software-quality/security tools. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
- Revenue: $542.0, up 13% from $479.0. Time-based license revenue was $431.0 (+8%); upfront license revenue $46.5 (+37%); maintenance and service revenue $64.5 (+44%). Professional services growth offset a 7% decline in maintenance revenue.
- Profit and margins: Gross profit was $417.4, with a 77.0% gross margin versus $373.1 and 77.9%. Operating income was $71.5, up 19%, with a 13.2% operating margin versus 12.6%. Net income was $65.2, down 4% from $67.7; net margin was 12.0% versus 14.1%. Diluted EPS was $0.41 versus $0.43.
- Cash flow: Operating activities used $87.3, compared with $73.9 used in the prior-year quarter. Investing activities used $140.9, largely reflecting net purchases of short-term investments; financing provided $57.8, including $250.0 of revolver borrowings and share-repurchase payments.
- Liquidity: Cash, cash equivalents and short-term investments totaled $917.1 at quarter-end, down from $985.8 at October 31, 2014. Working capital was $73.2, down from $117.9; accounts receivable was $283.0 and DSO improved to 48 days from 55.
- Debt: Total debt was $302.5, comprising $235.0 outstanding on the revolver and $67.5 on the term loan, compared with $75.0 total debt at October 31, 2014. Revolver and term-loan rates were LIBOR +0.975% and LIBOR +1.125%, respectively.
- Other measures: Restructuring charges were $15.3. The effective tax rate was 14.9%, up from 4.9%. Comprehensive income was $30.0, including $35.2 of other comprehensive loss, principally currency translation and hedging effects.
Material changes versus prior-year quarter
- Revenue growth reflected overall business growth and acquired-company contributions. Professional services and hardware-related upfront revenue increased; maintenance revenue declined slightly due mainly to timing.
- Operating expenses included $15.3 of restructuring charges; cost of revenue and operating expenses together rose to $470.5 from $418.8. Higher personnel costs, acquisitions and acquired-intangible amortization contributed to expense growth.
- Net income and diluted EPS declined despite higher revenue and operating income, primarily amid higher tax expense and lower other income. The prior-year quarter included approximately $10.0 of tax benefits from an IRS settlement.
- Cash and cash equivalents fell, while short-term investments rose to $120.2. The company drew $250.0 on its revolver, primarily to fund a $180.0 accelerated share repurchase (ASR); $36.0 remained to be settled under the ASR forward contract.
Outlook, commentary, risks and unusual items
- Management described the business outlook as solid, citing technology, customer relationships, the time-based revenue model, expense management and acquisitions. It expects cash, investments, operating cash generation and available revolver capacity to meet routine requirements for at least the next 12 months. The filing provides no specific numerical revenue or earnings guidance.
- More than 90% of revenue was time-based; management generally expects this share to remain around 90%. Revenue recognition and quarterly results can vary with contract renewals, license mix, customer payment terms, project timing and hardware sales.
- The November 2014 restructuring program comprised a voluntary retirement program and limited headcount reductions. It was substantially complete; $12.6 of the $15.3 cost had been paid, with the remaining $2.7 expected to be paid during FY2015.
- In Mentor Graphics patent litigation, a jury assessed approximately $36 of damages against Synopsys over certain ZeBu product features. Mentor sought an injunction; Synopsys opposed it and intended to appeal. Separately, a court granted Mentor summary judgment on three Synopsys patents in another action. Litigation outcomes remain uncertain.
- Approximately 87% of worldwide cash, cash equivalents and short-term investments were held by foreign subsidiaries and considered indefinitely reinvested; repatriation could trigger additional U.S. taxes if not previously accrued. One customer contributed 11.3% of quarterly revenue.
- Key risks include semiconductor-industry spending and design activity, competition, acquisition integration (including Coverity), foreign exchange and international operations, cybersecurity, tax examinations and changes in tax or accounting rules. The company had $126.1 of gross unrecognized tax benefits, excluding interest and penalties; the timing and outcome of resolutions are uncertain.
- ASU 2014-09, the new revenue-recognition standard, is effective for FY2018. Synopsys was evaluating its impact and had not selected a transition method.
Important facts for investors to verify
- Whether revenue growth and the mix of time-based, upfront and professional-services revenue persist, and how renewals and customer payment terms affect cash conversion.
- Cash generation and liquidity, including the impact of working-capital movements, the revolver balance, debt covenants and the concentration of funds overseas.
- Final ASR settlement, share count effects and remaining authorization under the repurchase program.
- Developments in Mentor litigation, including the damages verdict, injunction request and planned appeal.
- Changes in the effective tax rate, the research-credit benefit, unrecognized tax benefits and potential repatriation taxes.
- Coverity integration and acquisition-related effects on growth, expenses and amortization; and the eventual impact of ASU 2014-09.