Synopsys, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Synopsys supplies electronic design automation (EDA) software, semiconductor intellectual property (IP), system-validation hardware and software, professional services, and software security and quality tools. Fiscal 2018 was a 53-week year ended November 3, 2018; fiscal 2017 was a 52-week year. The filing presents financial statements using October 31 labels. The filing is annual, with unaudited fourth-quarter data also provided.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $3.121 billion | $2.725 billion | +15% |
| Gross margin | $2.385 billion; 76.4% | $2.071 billion; 76.0% | Margin +0.4 percentage points |
| Operating income | $360.2 million; 11.5% margin | $347.6 million; 12.8% margin | +4% |
| Net income | $432.5 million | $136.6 million | +217% |
| Diluted EPS | $2.82 | $0.88 | — |
| Operating cash flow | $424.2 million | $634.6 million | −$210.4 million |
Fiscal 2018 revenue mix: time-based products $2.303 billion (+14%), upfront products $357.7 million (+6%), and maintenance and services $460.0 million (+26%). The increase reflected higher time-based license revenue from prior-period bookings, acquisitions, more professional-services work, and approximately $46 million from the extra fiscal week.
Fourth-quarter revenue was $795.1 million, versus $696.6 million a year earlier. Q4 net income was $254.3 million, including substantial tax benefits; pretax income was $52.2 million.
Cash and cash equivalents were $723.1 million, down from $1.048 billion. Cash used in investing was $743.5 million, including acquisition and intangible-asset spending; cash provided by financing was $5.1 million. Working capital was negative $558.6 million, versus positive $68.5 million in FY2017, principally reflecting higher short-term debt and deferred revenue. Total short- and long-term debt was approximately $469.3 million at year-end. The company had $330 million outstanding on its revolver at year-end and reported $430 million outstanding on December 14, 2018. It was in compliance with credit-facility covenants and said available cash, operating cash flow, and credit were expected to cover routine needs for at least 12 months.
Material changes versus FY2017
- Revenue grew 15%, while total cost of revenue and operating expenses increased 16%; expenses rose to $2.761 billion, mainly from personnel and acquisition-related costs.
- Operating income rose only 4%, and operating margin declined to 11.5% from 12.8%.
- Operating cash flow fell 33%, affected by higher vendor payments, income taxes, receivables and inventory. FY2018 cash disbursements included $163.3 million of specified one-time income-tax payments and the $65 million Mentor settlement.
- Net income rose sharply primarily because the company recorded a $69.0 million income-tax benefit, compared with a $246.5 million tax provision in FY2017. The FY2018 tax benefit included a $172.0 million benefit from restructuring foreign IP rights, partly offset by other tax charges.
- Backlog increased to approximately $4.0 billion from $3.7 billion, mainly due to timing of large multi-year renewals. Management expected $1.7 billion of backlog to be recognized after FY2019; backlog is not a guarantee of future revenue.
Outlook, commentary, risks and unusual items
- Management described a strategy of extending EDA leadership, expanding IP, and growing software security and quality offerings. It did not provide a specific FY2019 revenue or earnings forecast in the supplied filing text.
- Management said adoption of revenue standard Topic 606 in FY2019 was not expected to materially change the nature or timing of revenue for TSL contracts overall, but IP revenue would be recognized upon delivery rather than over the contract period. The company expected some period-to-period revenue variability to increase. It anticipated an immaterial year-end backlog adjustment to retained earnings.
- The company expected adoption of the new lease standard in FY2020 to have a material balance-sheet impact. It also expected an approximately $129.8 million reduction to opening retained earnings upon FY2019 adoption of guidance on intra-entity asset transfers other than inventory.
- Tax exposures remain significant: the company paid $62.5 million, including interest and penalties, following the Hungarian tax assessment and continued to contest the withholding-tax issue. Approximately $36.2 million of the assessment remained at issue. The $67.7 million tax payment associated with the IP restructuring was recorded as prepaid tax and remains subject to examination. Management noted uncertainty over the future effects of Tax Act provisions, including GILTI and BEAT.
- The $65 million Mentor patent-litigation settlement was paid in FY2018; a possible additional termination charge of up to $25 million under the related agreement depends on specified conditions.
- Other key risks include dependence on semiconductor and electronics demand, customer concentration (Intel represented 15.4% of FY2018 revenue), industry consolidation, competition and rapid technology change, international trade and foreign-currency exposure, cybersecurity, acquisitions, and hardware supply and margin risks. About 75% of cash was held by foreign subsidiaries.
- Synopsys acquired Black Duck for approximately $565 million in purchase consideration. Total cash consideration for FY2018 acquisitions was $637 million, net of acquired cash, cash equivalents and short-term investments, as described in the filing.
Important facts for investors to verify
- How much of FY2018 net-income growth and Q4 earnings resulted from one-time tax items, and what tax rate and cash-tax profile management expects going forward.
- Whether operating cash flow recovers after FY2018’s lower cash generation, acquisition spending, tax payments, and increase in receivables and inventory.
- The classification, repayment schedule, interest-rate exposure, and availability of revolver borrowings, including the post-year-end draw.
- How backlog converts to recognized revenue and cash, particularly the portion expected after FY2019 and the effects of Topic 606 adoption.
- The outcome and potential cash or earnings effects of the remaining Hungarian tax dispute, tax-authority examinations, and the conditional Mentor charge.
- Whether revenue growth, especially in services, IP, hardware, and acquired software-security businesses, supports margins as operating costs rise.