Synopsys, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter ended April 30, 2021; six-month results are for the six months ended April 30, 2021. Dollar amounts below are in millions unless stated otherwise. Synopsys provides electronic design automation (EDA), semiconductor intellectual property (IP), system design and software integrity products and services.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Change |
|---|---|---|---|
| Revenue | $1,024.3 | $861.3 | +19% |
| Gross margin | 79.1% | 78.6% | +0.5 percentage points |
| Operating income | $194.2 | $125.9 | +54% |
| Operating margin | 19.0% | 14.6% | +4.4 percentage points |
| Net income attributable to Synopsys | $195.1 | $109.9 | +77% |
| Diluted EPS | $1.24 | $0.71 | +75% |
- Revenue mix: Time-based products were $648.8 million (+10%); upfront products were $209.1 million (+61%); maintenance and service were $166.4 million (+18%). Upfront product growth reflected higher IP demand and hardware shipment timing.
- Segments: Semiconductor & System Design revenue rose 20% to $930.4 million; adjusted operating margin increased to 33% from 27%. Software Integrity revenue rose 6% to $93.9 million, while adjusted operating margin fell to 9% from 13% as expenses grew.
- Six months: Revenue increased 18% to $1,994.6 million; operating income was $342.6 million versus $213.4 million; net income attributable to Synopsys was $357.4 million versus $214.0 million; diluted EPS was $2.27 versus $1.39.
- Cash flow: Six-month operating cash flow was $700.3 million, up from $389.7 million. Investing used $120.8 million and financing used $363.7 million. Cash, cash equivalents and restricted cash ended at $1,460.2 million.
- Liquidity and debt: Cash and cash equivalents were $1,457.9 million. Current assets of $2,689.8 million exceeded current liabilities of $2,255.7 million; working capital was approximately $434.1 million and the current ratio was 1.19. Debt was approximately $115.6 million, including $89.9 million under the term loan and $25.6 million under a China facility. No revolver borrowings were outstanding; the company reported compliance with debt covenants.
Material changes and notable items
- Q2 revenue growth was led by Semiconductor & System Design and upfront product sales. Deferred revenue increased to $1,680.3 million from $1,493.1 million at fiscal year-end. Contracted unsatisfied or partially unsatisfied performance obligations were approximately $4.8 billion; about 49% excluding non-cancellable FSA commitments was expected to be recognized within 12 months.
- Operating expenses increased, primarily from employee-related costs, headcount growth and deferred compensation expense. There were no restructuring charges in Q2 FY2021, compared with $29.7 million in Q2 FY2020.
- Other income included a $21.4 million gain on assets related to the executive deferred compensation plan, compared with an $18.5 million loss in the prior-year quarter. This materially supported the year-over-year increase in pretax income.
- The six-month effective tax rate was 9.2%, versus a benefit rate of 2.0% in the prior-year period. The filing attributes the increase primarily to California limits on R&D credits and changes in foreign tax credit realizability.
- Share repurchases totaled $398.1 million in the first half. At April 30, $59.8 million remained authorized for future repurchases.
Outlook, risks and contingencies
- The filing does not provide a clear numerical revenue or earnings guidance range. Management said it believed existing cash, operating cash generation and available revolving credit would cover routine business needs for at least the next 12 months and the foreseeable future.
- Management reported limited operational impact from COVID-19 to date, but cautioned that future effects remain uncertain. Risks include customer spending and payment changes, supply-chain disruptions, and continuing remote-work or office restrictions.
- Revenue and earnings may vary with the timing of upfront IP and hardware sales, customer requirements, FSA drawdowns, royalties and consulting projects. Management also noted dependence on large customers, competition, and semiconductor and electronics industry activity.
- Trade restrictions and export licensing, particularly involving China, could constrain sales or customer activity. The company also cited foreign-currency exposure, cybersecurity threats, hardware supply dependence and acquisition integration as risks.
- Hungarian tax dispute: The Hungarian Administrative Court ruled against the company’s subsidiary again in April 2021 in a dispute concerning withholding taxes. The company received the written opinion on May 19, 2021 and was evaluating an appeal. The filing states the ruling had no impact on the six-month financial statements. The company had previously paid the disputed assessment, interest and penalties.
- Management estimated that resolution of certain tax audits or expiration of statutes of limitation could reduce unrecognized tax benefits by $0–$44 million within 12 months; timing and settlement outcomes remain uncertain.
Key facts for investors to verify
- Whether the strong upfront IP and hardware sales recur, given management’s warning that their timing can make revenue less predictable.
- Whether Semiconductor & System Design growth continues and Software Integrity margins stabilize.
- How much of the $4.8 billion performance-obligation balance converts to revenue, and whether deferred revenue trends remain supportive.
- The contribution of deferred compensation asset gains to reported earnings and the sustainability of earnings excluding this volatility.
- Developments in the Hungarian tax appeal and other tax examinations, and any changes to the company’s estimated exposure.
- Cash deployment, including the remaining share-repurchase authorization, acquisitions, debt repayments and liquidity needs.