10-QPeriod: Q2 FY2005

SYNOPSYS INC Quarterly Report for Q2 Ended Apr 30, 2005

Filed June 2, 2005For Securities:SNPS

Summary

Synopsys Inc. (SNPS) reported its second-quarter results for fiscal year 2005, showing a net loss of $5.0 million ($0.03 per share) compared to a net income of $28.7 million ($0.19 per share) in the prior year's second quarter. This decline is primarily attributed to a strategic shift in their licensing model towards time-based licenses, which spreads revenue recognition over a longer period, impacting short-term revenue figures. Despite the reported net loss, the company's operational cash flow remained strong, increasing to $130.6 million for the first six months of fiscal 2005, up from $101.7 million in the prior year, driven by lower tax payments. The company also made significant strategic moves, including the acquisition of ISE Integrated Systems Engineering AG in November 2004, which contributed to an increase in goodwill on the balance sheet. Synopsys continues to actively manage its capital structure, repurchasing approximately $85.1 million in stock during the first six months of fiscal 2005. Looking ahead, the company is navigating a challenging semiconductor market environment characterized by cautious customer spending and ongoing industry consolidation, while also preparing for the adoption of new stock-based compensation accounting standards that are expected to materially impact future reported earnings.

Key Highlights

  • 1Reported a net loss of $5.0 million ($0.03/share) for the second quarter of fiscal 2005, a decrease from a net income of $28.7 million ($0.19/share) in the prior year's quarter.
  • 2Revenue for the quarter declined 17% year-over-year to $244.3 million, primarily due to the strategic shift to a time-based licensing model that defers revenue recognition.
  • 3Time-based license revenue increased by 8% to $175.8 million, while upfront license revenue significantly decreased by 77% to $17.2 million.
  • 4Operating cash flow for the first six months of fiscal 2005 was strong at $130.6 million, an increase from $101.7 million in the same period last year.
  • 5The company repurchased $85.1 million of its common stock in the first six months of fiscal 2005, indicating a focus on returning capital to shareholders.
  • 6Goodwill increased significantly to $667.1 million as of April 30, 2005, largely due to the acquisition of ISE Integrated Systems Engineering AG in November 2004.
  • 7The company is preparing for the adoption of SFAS 123R (Share-Based Payment) in fiscal year 2006, which is expected to result in substantial increases in reported stock-based compensation expense.

Frequently Asked Questions

The primary reason for the decrease in reported net income is the company's strategic shift to a time-based licensing model. This model spreads revenue recognition over the license term, leading to lower revenue and net income in the current period compared to the prior year, which benefited from a higher proportion of upfront license revenue.

Synopsys is demonstrating strong operational cash flow, which increased to $130.6 million for the first six months of fiscal 2005. This improvement is attributed to factors such as lower foreign income tax payments in the current period. The company also maintains a healthy balance of cash, cash equivalents, and short-term investments totaling $524.3 million as of April 30, 2005.

The acquisition of ISE Integrated Systems Engineering AG, completed in November 2004, contributed approximately $73.4 million to goodwill, increasing the total goodwill on the balance sheet to $667.1 million. The acquisition also led to an in-process research and development charge of $5.7 million in the six months ended April 30, 2005.

Synopsys operates in the semiconductor and electronics industries, which are subject to market cyclicality. The company notes that while the semiconductor industry experienced growth in prior years, EDA spending has not fully tracked this recovery. They anticipate continued cautious customer spending and expect flat to modest industry growth in the near term, which could impact demand for their products and services.

Synopsys will be required to adopt SFAS 123R (Share-Based Payment) starting in its first quarter of fiscal 2006. This new standard will mandate the recognition of compensation expense for stock options and other stock-based awards using a fair-value method. The company anticipates this will result in a 'substantial additional compensation expense' and 'materially adversely affect' its reported results of operations and earnings per share, a significant change from their current intrinsic value method.