Why did net income rise while operating income fell?

Net income of $91.7 million includes a $28.4 million extraordinary gain (net of tax) from the October 1998 sale of the PCB/Systems business, Viewlogic Systems, which was spun off to a management buyout group, and a smaller gain from retiring IBM-related debt. Excluding these items, income before extraordinary items fell to $63.3 million from $82.0 million, reflecting higher merger and in-process R&D charges.

How much of Synopsys' revenue comes from recurring services?

Service revenue was $287.0 million in fiscal 1998, or about 40% of total revenue, up from 37% in fiscal 1997 and 34% in fiscal 1996. It includes maintenance and support, training, and consulting, and it grew 20% year over year, faster than product revenue at 6%.

What are the main competitive and customer risks?

Synopsys competes with Cadence, Mentor Graphics and Avant!. Cadence was one of its ten largest customers in fiscal 1998, and its acquisition of logic design products could reduce purchases of Synopsys software. Synopsys also has a relatively limited physical design product line and says it will need further tools or acquisitions to offer a complete design flow.

What is the status of the Everest and IBM transactions?

Synopsys agreed in October 1998 to acquire Everest Design Automation for about 1.4 million shares, a pooling-of-interests deal that adds gridless high-level routing technology. The company rescinded its stock repurchase program to meet pooling rules. Its IBM joint development alliance, which began in 1996, continues to be discussed, and a second joint product is expected in January 1999. The company states there is no assurance the joint development will continue.

What are the key Year 2000 and demand-related risks?

As of September 30, 1998, Synopsys had completed about 30% of its internal Year 2000 projects and inspected or tested about 80% of its products, with total costs estimated at no more than $5.9 million. Its contingency plan was not yet complete. Demand risk comes mainly from Asian economic weakness, possible slowing in U.S. semiconductor growth, and customer budget cuts, which could reduce EDA spending.

SNPS 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 23, 1998. Cited figures are marked; the original filing is the authoritative source.

Synopsys, Inc. (SNPS) reported fiscal 1998 (year ended September 30, 1998, a 53-week year) revenue of $717.9 million^a, up 11% from $647.0 million, with net income of $91.7 million, or $1.34 diluted EPS, versus $82.0 million and $1.25 a year earlier.

The headline figure is flattered by $28.4 million^b of extraordinary gains from the spin-off of the PCB/Systems business (Viewlogic Systems) and early debt extinguishment. Income before extraordinary items was $63.3 million, down from $82.0 million, because of $51.0 million in merger-related costs and $33.1 million in in-process R&D charges tied to the Viewlogic and Systems Science acquisitions. Operating income fell to $93.1 million from $108.7 million.

The balance sheet strengthened. Cash and short-term investments rose to $599.8 million, stockholders' equity grew to $660.4 million^c, and working capital reached $500.3 million. Service revenue reached 40% of the total, supporting a shift toward recurring maintenance and consulting income.

International sales slipped to 39%^d of revenue, reflecting Asia/Pacific and Japanese weakness. The company said Cadence, a major customer, is both a direct competitor and a possible source of reduced orders as it absorbs logic synthesis products. Investors should weigh several risks.

Synopsys has a thin physical design product line, which it is trying to fill through the Everest merger. It depends on IBM for a joint development program whose future is under discussion. Its synthesis franchise is maturing, and the company is cautious about a slowdown in semiconductor design starts in 1999.

Year 2000 remediation was about 30% complete at year-end, with a cost estimate of $5.9 million. The company's own disclosures describe the Everest merger as a planned pooling-of-interests combination, and the stock repurchase program was rescinded to comply with pooling accounting.

02—Key points

Key Highlights

Revenue rose 11% to $717.9 million in FY1998, with service revenue up 20% to $287.0 million and now 40% of total revenue
Net income of $91.7 million ($1.34 diluted EPS) includes a $28.4 million extraordinary gain from the Viewlogic PCB/Systems spin-off and debt extinguishment; income before extraordinary items was $63.3 million, down from $82.0 million
Operating income fell to $93.1 million from $108.7 million due to $51.0 million of merger-related costs and $33.1 million of in-process R&D charges
Cash and short-term investments reached $599.8 million, and stockholders' equity rose to $660.4 million
Flagship Design Compiler and PrimeTime remain core products; VCS, Formality and Module Compiler are cited as key growth drivers
International revenue share declined to 39% from 41%, due to Asia/Pacific and Japanese economic weakness
Concentration and partnership risks: Cadence is both a competitor and a major customer, and the IBM joint development alliance is under review

03—Questions

Frequently Asked Questions

Why did net income rise while operating income fell?
Net income of $91.7 million includes a $28.4 million extraordinary gain (net of tax) from the October 1998 sale of the PCB/Systems business, Viewlogic Systems, which was spun off to a management buyout group, and a smaller gain from retiring IBM-related debt. Excluding these items, income before extraordinary items fell to $63.3 million from $82.0 million, reflecting higher merger and in-process R&D charges.
How much of Synopsys' revenue comes from recurring services?
Service revenue was $287.0 million in fiscal 1998, or about 40% of total revenue, up from 37% in fiscal 1997 and 34% in fiscal 1996. It includes maintenance and support, training, and consulting, and it grew 20% year over year, faster than product revenue at 6%.
What are the main competitive and customer risks?
Synopsys competes with Cadence, Mentor Graphics and Avant!. Cadence was one of its ten largest customers in fiscal 1998, and its acquisition of logic design products could reduce purchases of Synopsys software. Synopsys also has a relatively limited physical design product line and says it will need further tools or acquisitions to offer a complete design flow.
What is the status of the Everest and IBM transactions?
Synopsys agreed in October 1998 to acquire Everest Design Automation for about 1.4 million shares, a pooling-of-interests deal that adds gridless high-level routing technology. The company rescinded its stock repurchase program to meet pooling rules. Its IBM joint development alliance, which began in 1996, continues to be discussed, and a second joint product is expected in January 1999. The company states there is no assurance the joint development will continue.
What are the key Year 2000 and demand-related risks?
As of September 30, 1998, Synopsys had completed about 30% of its internal Year 2000 projects and inspected or tested about 80% of its products, with total costs estimated at no more than $5.9 million. Its contingency plan was not yet complete. Demand risk comes mainly from Asian economic weakness, possible slowing in U.S. semiconductor growth, and customer budget cuts, which could reduce EDA spending.

04—Continue

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