10-QPeriod: Q3 FY2005

SYNOPSYS INC Quarterly Report for Q3 Ended Jul 31, 2005

Filed September 6, 2005For Securities:SNPS

Summary

Synopsys, Inc. (SNPS) reported its third-quarter and nine-month results for the period ending July 31, 2005. The company's financial performance reflects a significant shift in its revenue model, moving predominantly towards time-based licenses from upfront licenses. This transition, initiated in the fourth quarter of fiscal 2004, has impacted reported revenue, which declined year-over-year for both the three and nine-month periods. While this strategic shift is expected to improve revenue predictability long-term, it led to lower current period results and an anticipated lower full-year revenue for fiscal 2005 compared to fiscal 2004. Acquisitions played a notable role, with the integration of Nassda Corporation during the quarter. The company also highlighted significant legal and tax matters, including a substantial IRS proposed tax deficiency related to transfer pricing and ongoing analysis of potential foreign earnings repatriation. Despite revenue pressures from the model shift, Synopsys maintained a strong liquidity position with substantial cash, cash equivalents, and short-term investments.

Key Highlights

  • 1Total revenue for the three months ended July 31, 2005, was $251.5 million, a decrease of 11% compared to $281.7 million in the prior year period.
  • 2The company's strategic shift to a time-based license model resulted in a 74% decrease in upfront license revenue for the quarter ($16.2 million vs. $62.4 million).
  • 3Time-based license revenue increased by 15% to $188.7 million, reflecting the continued phase-in of the new model.
  • 4Net income for the quarter was $17.3 million, down from $41.8 million in the same period last year, largely due to the revenue model transition and acquisition-related expenses.
  • 5Synopsys acquired Nassda Corporation for $200.2 million in cash during the quarter, expanding its mixed-signal and memory design software offerings.
  • 6The company holds a robust liquidity position with $499.4 million in cash, cash equivalents, and short-term investments as of July 31, 2005.
  • 7A significant legal contingency exists with the IRS proposing a $476.8 million tax deficiency for fiscal years 2000-2001, which Synopsys is contesting.

Frequently Asked Questions

The primary reason for the decrease in revenue is Synopsys' strategic shift away from upfront license sales towards a time-based license model. This change, implemented in late fiscal 2004, impacts how revenue is recognized, spreading it over the license term rather than recognizing a larger portion upfront. While this improves revenue predictability, it lowers current period reported revenue.

The acquisition of Nassda Corporation, completed in the third quarter, expanded Synopsys' product offerings. Its results of operations are included from the acquisition date. While not considered material enough to require pro forma statements, the acquisition contributed to increased R&D expenses due to related headcount and compensation accruals, and a $33 million litigation settlement gain was recognized in 'Other Income'.

The IRS has proposed a tax deficiency of approximately $476.8 million plus interest for fiscal years 2000-2001, primarily related to transfer pricing between Synopsys and a foreign subsidiary. Synopsys is vigorously contesting this assessment, but acknowledges that an adverse outcome could materially affect its financial condition. The company believes it is adequately provided for this matter but acknowledges potential for additional payments.

Synopsys maintains a strong liquidity position, with $499.4 million in cash, cash equivalents, and short-term investments as of July 31, 2005. Cash provided by operations was $194.9 million for the nine months ended July 31, 2005. The company expects its current cash and expected operating cash flow to meet its business requirements for at least the next twelve months.