10-QPeriod: Q3 FY2008

SYNOPSYS INC Quarterly Report for Q3 Ended Jul 31, 2008

Filed September 9, 2008For Securities:SNPS

Summary

Synopsys Inc. (SNPS) reported its third quarter and nine-month results for the period ending July 31, 2008. The company demonstrated solid revenue growth, with total revenue increasing by 13% year-over-year for the quarter to $344.1 million, driven primarily by a 15% increase in time-based license revenue. Net income saw a significant rise to $57.7 million for the quarter, compared to $24.9 million in the prior year, boosted by revenue growth and a favorable tax settlement. The company also completed the acquisition of Synplicity, Inc. for $180.6 million in cash, aiming to expand its technology portfolio and market reach. Financially, Synopsys maintained a strong liquidity position with over $877 million in cash, cash equivalents, and short-term investments. The company continued its share repurchase program, although repurchases were less significant in the recent quarter. A notable event during the period was the favorable resolution of a significant portion of the 2000-2001 IRS examination related to transfer pricing, which resulted in a tax benefit. However, the company is still engaged in an IRS examination for fiscal years 2002-2004, which proposed a substantial tax deficiency.

Key Highlights

  • 1Total revenue for the third quarter increased 13% to $344.1 million, with time-based license revenue up 15%.
  • 2Net income for the third quarter rose to $57.7 million ($0.39 diluted EPS) from $24.9 million ($0.17 diluted EPS) in the prior year.
  • 3Completed the acquisition of Synplicity, Inc. for $180.6 million in cash to enhance technology offerings.
  • 4Maintained a strong liquidity position with $877.1 million in cash, cash equivalents, and short-term investments as of July 31, 2008.
  • 5Achieved a favorable resolution for a significant portion of the 2000-2001 IRS transfer pricing examination, resulting in a tax benefit.
  • 6Total operating expenses increased 2% to $227.1 million for the quarter, while revenue grew 13%, demonstrating effective cost management.
  • 7Goodwill increased significantly to $896.6 million from $767.1 million due to the Synplicity acquisition, reflecting anticipated synergies.

Frequently Asked Questions

The acquisition of Synplicity, Inc. on May 15, 2008, for $180.6 million in cash, is expected to expand Synopsys' technology portfolio and market reach. Financially, it contributed $20.6 million to upfront license revenue in the third quarter. The acquisition also led to an increase in goodwill by approximately $118.4 million and added to headcount in research and development, sales and marketing, and general and administrative expenses.

Synopsys primarily uses a time-based license (TSL) model, where revenue is recognized ratably over the license term (typically three years), including bundled maintenance. This means revenue in any given quarter is largely driven by TSL orders booked in prior periods. While this provides recurring revenue and reduces quarter-to-quarter volatility, it means upfront license revenue, recognized upon shipment, is a smaller portion of the total, with upfront license revenue for the quarter being $20.6 million, an increase of 8% year-over-year.

Synopsys reached a favorable resolution for a significant portion of the 2000-2001 IRS transfer pricing examination, resulting in a tax benefit. However, the IRS has proposed an adjustment for fiscal years 2002-2004 that could result in an aggregate tax deficiency of approximately $236.2 million. Synopsys has filed a protest and believes it has strong defenses, but an adverse outcome could materially impact its financial condition. The company believes it has adequately provided for potential liabilities related to these examinations.

Synopsys maintained a strong liquidity position, with total cash, cash equivalents, and short-term investments at $877.1 million as of July 31, 2008, a decrease of 11% from October 31, 2007, primarily due to investments in acquisitions and stock repurchases. Cash provided by operating activities was $215.2 million for the nine months ended July 31, 2008. The company had no outstanding borrowings under its $300 million credit facility and was in compliance with all covenants.