10-QPeriod: Q1 FY2006

SYNOPSYS INC Quarterly Report for Q1 Ended Jan 31, 2006

Filed March 9, 2006For Securities:SNPS

Summary

Synopsys, Inc. (SNPS) reported its first quarter fiscal year 2006 results, showing a notable shift from a net loss in the prior year's comparable quarter to a net income of $1.7 million. This turnaround was driven by a 8% increase in total revenue to $260.2 million, primarily due to the continued adoption of a time-based licensing model that recognizes revenue over the term of the license. While time-based license revenue saw a strong 13% increase, upfront license revenue declined, aligning with the company's strategic shift. The adoption of SFAS 123(R) for stock-based compensation significantly impacted operating expenses, leading to an increase in reported expense but also contributing to the overall net income improvement by reducing in-process R&D charges compared to the prior year. The company also completed a strategic acquisition of HPL Technologies, Inc., aimed at strengthening its Design for Manufacturing (DFM) capabilities. Despite positive revenue growth and improved net income, operating cash flow saw a substantial decrease, largely due to changes in vendor payments and cash collections. Investors should note the ongoing IRS tax audit, which represents a significant potential contingent liability.

Key Highlights

  • 1Revenue increased by 8% to $260.2 million, driven by a 13% rise in time-based license revenue due to the ongoing shift to a ratable revenue recognition model.
  • 2The company reported a net income of $1.7 million ($0.01 per diluted share), a significant improvement from a net loss of $14.3 million ($0.10 per diluted share) in the prior year's quarter.
  • 3Adoption of SFAS 123(R) for stock-based compensation resulted in $18.4 million in recognized expense, impacting operating expenses but contributing to a lower in-process R&D charge compared to the prior year.
  • 4Acquisition of HPL Technologies, Inc. was completed for $16.4 million, aimed at bolstering Synopsys' Design for Manufacturing (DFM) software capabilities.
  • 5Total cost of revenue decreased by 21% to $55.2 million, primarily due to a significant reduction in amortization of intangible assets.
  • 6Operating cash flow decreased by 86% to $19.8 million, influenced by increased vendor payments and changes in cash collections.
  • 7The company continues to actively repurchase its common stock, spending $81.0 million in the quarter, with $355.6 million remaining under its authorized repurchase program.

Frequently Asked Questions

The primary driver of revenue growth is the company's continued transition to a time-based licensing model (Technology Subscription Licenses or TSLs). This model recognizes revenue ratably over the term of the license, which, while potentially lowering upfront revenue, provides more predictable and consistent revenue streams over time. Time-based license revenue increased by 13% year-over-year.

The adoption of SFAS 123(R) on November 1, 2005, requires companies to recognize stock-based compensation expense at fair value. For Synopsys, this resulted in $18.4 million of stock-based compensation expense in the quarter, increasing operating expenses, particularly in R&D, Sales & Marketing, and G&A. However, this was offset by a significant reduction in in-process R&D charges and lower amortization of intangibles compared to the prior year's quarter, contributing to the reported net income.

Synopsys received a Notice of Proposed Adjustment from the IRS for fiscal years 2000 and 2001, proposing a net tax deficiency of approximately $476.8 million plus interest, related to transfer pricing. The company has filed a protest and is contesting these adjustments vigorously, believing they are inconsistent with tax laws. While Synopsys believes it has adequately provided for this matter, it acknowledges that an adverse outcome could materially and adversely affect its financial condition and results of operations. Resolution could take years.

Synopsys acquired HPL Technologies, Inc. for $16.4 million. This acquisition is strategic, aimed at strengthening Synopsys' position in the Design for Manufacturing (DFM) software market. The integration of HPL's yield management and test chip technologies is expected to enhance Synopsys' comprehensive design-to-silicon flow and expand its DFM R&D expertise.