Synopsys, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Fiscal quarter ended January 31, 2012. The quarter included 14 weeks, compared with 13 weeks in Q1 FY2011; management attributed approximately $26 million of revenue and $16 million of expense to the additional week. Synopsys supplies electronic design automation (EDA) software and hardware, semiconductor IP, and related services, and reports as one operating segment.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $425.5 million | $364.6 million | +17% |
| Gross profit / margin | $335.6 million / 78.9% | $280.3 million / 76.9% | Margin +2.0 percentage points |
| Operating income / margin | $70.0 million / 16.5% | $46.7 million / 12.8% | Income +50% |
| Net income | $56.7 million | $48.2 million | +18% |
| Diluted EPS | $0.39 | $0.31 | Up $0.08 |
| Operating cash flow | $(39.3) million | $(39.6) million | Cash used remained similar |
- Time-based license revenue rose 20% to $355.9 million; upfront license revenue increased 8% to $28.5 million. Maintenance and service revenue declined 3% to $41.1 million.
- Operating expenses increased 14% to $265.6 million, primarily reflecting higher personnel costs, headcount and the extra week. Cost of revenue increased 7% to $89.9 million; as a share of revenue, it fell to 21% from 23%.
- The effective tax rate rose to 23.2% from 7.8%, principally because the U.S. federal R&D tax credit had expired at December 31, 2011, while the prior-year comparison included an extended credit.
Financial position and liquidity
- At January 31, 2012, cash, cash equivalents and short-term investments totaled $943.5 million, down $60.6 million from October 31, 2011. Working capital was $426.2 million; current assets were $1,289.7 million and current liabilities $863.8 million.
- Total liabilities were $1,127.2 million. No borrowings were outstanding under the $350 million revolving facility at quarter-end; the company reported covenant compliance. The filing does not identify material funded debt at that date.
- Operating cash use was $39.3 million. Investing cash use was $1.5 million and financing cash flow was approximately breakeven. Cash declined by $43.7 million during the quarter.
- Approximately $748.4 million of cash and short-term investments were held in foreign subsidiaries; management said certain foreign earnings were considered indefinitely reinvested. Repatriation could require additional U.S. taxes if not previously accrued.
Material changes, outlook and other items
- Revenue growth was driven primarily by time-based licenses, including contracts booked in prior periods, and by the additional fiscal week. Management described its outlook as positive, citing recurring revenue, customer relationships, and demand for mobile electronics. It stated that recurring revenue generally exceeds 90% of total revenue and that more than 90% of quarterly revenue is typically committed at quarter entry. No specific forward-period revenue or earnings guidance is provided in the supplied filing text.
- Fiscal 2012 is a 53-week year and ends November 3, 2012; the extra week is included in Q1 and affects comparisons.
- After quarter-end, Synopsys completed its Magma Design Automation acquisition on February 22, 2012, for approximately $523.1 million net of cash acquired. It funded the purchase with existing cash and borrowings. By March 6, it had drawn $100 million on the revolving facility and $150 million on a new $150 million term loan. Purchase accounting was incomplete at filing.
- Four shareholder lawsuits related to the Magma transaction had a proposed settlement memorandum of understanding, subject to customary conditions including court approval. A separate patent-infringement suit alleged that Synopsys’s VCS multicore and VCS Cloud products infringed a patent; it sought damages and an injunction.
- Management cited risks from economic and semiconductor-industry conditions, customer spending and payment behavior, competition, acquisition integration, foreign exchange, tax audits, and intellectual-property claims. The company reported disclosure controls effective as of quarter-end and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate underlying growth from the extra week’s estimated $26 million revenue contribution when assessing year-over-year performance.
- Track operating cash conversion and deferred revenue, which declined by $37.0 million in the quarter, despite higher reported earnings.
- Confirm Magma integration, final purchase accounting, and the resulting debt, interest expense, and covenant headroom in subsequent filings.
- Monitor the effective tax rate, R&D credit developments, and tax audit exposures; the filing cites a possible $0–$178 million decrease in unrecognized tax benefits over the coming 12 months, with timing and settlement uncertain.
- Follow the Magma lawsuit settlement approval and the outcome of the Dynetix patent litigation.