Synopsys, Inc. — Form 10-Q Summary
Business context and reporting period. Synopsys provides electronic design automation (EDA) software and hardware, semiconductor intellectual property (IP), and related services. This report covers the fiscal second quarter ended April 30, 2024, and the first six months of fiscal 2024. Unless stated otherwise, operating results below are from continuing operations; the Software Integrity business is classified as discontinued operations. Fiscal 2024 includes an extra week in the first quarter, adding approximately $70.5 million of revenue and $61.0 million of expenses to the six-month comparison.
Financial performance
| Metric | Three months ended Apr. 30, 2024 | Year-over-year | Six months ended Apr. 30, 2024 | Year-over-year |
|---|---|---|---|---|
| Revenue | $1,454.7 million | +15% | $2,965.7 million | +19% |
| Gross margin | $1,154.3 million; approximately 79.4% | Prior-year approximately 80.3% | $2,386.1 million; approximately 80.5% | Prior-year approximately 80.6% |
| Operating income | $332.1 million; approximately 22.8% margin | +14%; prior-year margin approximately 23.2% | $684.7 million; approximately 23.1% margin | +25%; prior-year margin approximately 22.0% |
| Net income attributable to Synopsys from continuing operations | $299.1 million | Compared with $275.6 million | $736.6 million | Compared with $545.3 million |
| Diluted EPS from continuing operations | $1.92 | Compared with $1.78 | $4.73 | Compared with $3.52 |
| Operating cash flow | Not presented separately for the quarter | $388.8 million | Compared with $817.7 million |
Revenue growth reflected gains across products and geographies. In the quarter, Design Automation revenue grew 14% to $1,054.9 million and Design IP grew 19% to $399.8 million. For the six months, Design IP grew 36% to $925.4 million and Design Automation grew 12% to $2,040.3 million. The six-month revenue increase also includes the extra fiscal week.
At April 30, cash, cash equivalents and short-term investments totaled $1.660 billion. Total debt was approximately $17.0 million, principally the outstanding China credit agreement; no borrowings were outstanding under the revolving credit facility or Ansys term loan facility. Synopsys reported $7.158 billion in stockholders’ equity. Cash flow from operations includes discontinued operations.
Six-month operating cash flow fell $428.9 million, primarily because federal tax payments were $358.0 million higher, including $187.0 million of fiscal 2023 taxes paid in fiscal 2024 after a payment extension. Investing cash outflow was $166.2 million, including $139.6 million for acquisitions. Financing cash outflow was $154.6 million, down from $591.2 million a year earlier, mainly because stock repurchases were substantially lower.
Material changes, outlook and risks
- Costs and margins: Quarterly operating expenses rose 14% to $822.2 million. Management cited higher employee-related costs; general and administrative expense also increased due partly to Ansys-related legal and professional fees. Hardware-related costs and IP consulting delivery costs increased cost of revenue. Quarterly gross margin percentage was lower year over year.
- Items affecting comparability: Six-month interest and other income was $114.3 million, including a $55.1 million gain on strategic investment sales. Results also included higher gains on deferred compensation plan assets, with related expense effects. Acquisition/divestiture-related costs were $50.1 million for the six months. The six-month tax rate was 8.6%, versus 6.4% a year earlier; the quarter’s rate was 13.3%, versus 8.1%.
- Backlog: Contracted remaining performance obligations were approximately $7.9 billion, including $1.2 billion of non-cancellable flexible spending commitments for which customers will select products and quantities later. Excluding those commitments, about 40% was expected to be recognized in the next 12 months. Management cautions that backlog is not necessarily indicative of future sales or revenue.
- Management outlook: Synopsys expects growth across its geographies in fiscal 2024, while anticipating a challenging near-term growth environment in China. The filing does not provide a clear quantified full-year revenue or earnings guidance figure in the supplied text.
- Ansys transaction: The pending cash-and-stock acquisition values Ansys at approximately $35.0 billion, with closing anticipated in the first half of calendar 2025, subject to regulatory and other conditions. Synopsys expects to fund approximately $19 billion of cash consideration through cash and debt and has $16.0 billion of committed debt financing, including an $11.7 billion bridge commitment and a $4.3 billion term loan facility. The term loan was undrawn at quarter-end. A $1.5 billion termination fee could be payable by Synopsys in specified circumstances. The company expects materially higher debt and liquidity needs after closing.
- Software Integrity divestiture: The May 5, 2024 agreement provides for proceeds of up to $2.1 billion: $1.5 billion at closing, $125 million in later installments, and up to $475 million contingent on the buyers achieving a specified return. Closing was expected in the second half of 2024, subject to customary conditions and regulatory approvals. The business generated $126.4 million of revenue and a $7.0 million after-tax loss in the quarter.
- Other risks and contingencies: Management identifies macroeconomic uncertainty, customer spending and timing variability, China-related trade restrictions and export controls, competition, cybersecurity, and transaction execution/integration as risks. Synopsys said export rules had not materially affected its business based on its current understanding, but it cannot predict future changes. It also disclosed BIS administrative subpoenas concerning transactions with certain Chinese entities and said it is cooperating. No legal proceedings were identified as expected to materially affect the business.
Important facts for investors to verify
- Progress on Ansys regulatory approvals, expected closing timing, final financing mix, debt levels and potential effects on interest costs, covenants and capital returns.
- Whether the Software Integrity divestiture closes as expected and the amount and timing of proceeds, especially the contingent consideration.
- Backlog conversion and customer drawdowns, including the significance of flexible spending commitments and upfront IP and hardware revenue timing.
- Underlying cash generation after the unusual tax-payment timing effects and the impact of the extra fiscal week on year-over-year comparisons.
- Revenue trends in China and the impact of any new export-control or geopolitical developments.