<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ --------------
Commission file number: 0-19807
SYNOPSYS, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 56-1546236
- ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 East Middlefield Road
Mountain View, CA 94043
-------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (415) 962-5000
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of July 19, 1996, there were 40,342,833 shares of the Registrant's Common
Stock outstanding.
1
<PAGE> 2
SYNOPSYS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-
June 30, 1996 and September 30, 1995 3
Condensed Consolidated Statements of Income-
Three months and nine months ended
June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows-
Nine months ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,580 $ 91,193
Short-term investments 212,575 118,791
--------- ---------
Cash and short-term investments 234,155 209,984
Accounts receivable, net of allowances of $2,493 and $2,813 46,499 42,863
Prepaid expenses and other 23,254 9,681
--------- ---------
Total current assets 303,908 262,528
Property and equipment, net 45,240 28,720
Capitalized software development costs, net of accumulated
amortization of $2,524 and $1,680 1,177 1,271
Long-term investment 26,398 --
Other assets 6,887 5,052
--------- ---------
Total assets $ 383,610 $ 297,571
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 59,342 $ 48,744
Current portion of long-term debt 12,071 4,061
Income taxes payable 10,810 9,908
Deferred revenue 67,614 52,556
--------- ---------
Total current liabilities 149,837 115,269
--------- ---------
Long-term debt 17,804 --
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
no shares outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 40,273,655 and 38,970,504 shares
outstanding 403 390
Additional paid-in capital 149,273 124,322
Retained earnings 67,378 57,838
Cumulative translation adjustment (351) (248)
Net unrealized gain on investment 5,339 --
Treasury stock, at cost (6,073) --
--------- ---------
Total stockholders' equity 215,969 182,302
--------- ---------
Total liabilities and stockholders' equity $ 383,610 $ 297,571
========= =========
</TABLE>
See accompanying notes
3
<PAGE> 4
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product $ 58,612 $ 47,088 $169,341 $130,804
Service 32,388 21,012 85,659 61,196
-------- -------- -------- --------
Total revenue 91,000 68,100 255,000 192,000
-------- -------- -------- --------
Cost of revenue:
Product 4,302 3,364 11,825 11,744
Service 6,240 3,994 16,244 10,483
-------- -------- -------- --------
Total cost of revenue 10,542 7,358 28,069 22,227
-------- -------- -------- --------
Gross margin 80,458 60,742 226,931 169,773
-------- -------- -------- --------
Operating expenses:
Research and development 21,921 15,261 60,564 41,998
Sales and marketing 34,032 26,202 96,954 74,281
General and administrative 7,005 5,779 19,813 16,194
In-process research and development -- 9,200 39,700 9,200
-------- -------- -------- --------
Total operating expenses 62,958 56,442 217,031 141,673
-------- -------- -------- --------
Operating income 17,500 4,300 9,900 28,100
Other income, net 1,700 1,500 5,250 3,308
-------- -------- -------- --------
Income before income taxes 19,200 5,800 15,150 31,408
Provision for income taxes 6,528 2,088 5,128 11,572
-------- -------- -------- --------
Net income $ 12,672 $ 3,712 $ 10,022 $ 19,836
======== ======== ======== ========
Earnings per share $ .30 $ .09 $ .24 $ .49
======== ======== ======== ========
Weighted average common shares
and equivalents where dilutive 42,556 40,760 41,183 40,122
</TABLE>
See accompanying notes
4
<PAGE> 5
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,022 $ 19,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,972 11,414
Interest accretion on notes payable 304 --
Provision for doubtful accounts and sales returns (320) 292
Tax benefit associated with stock options 3,000 8,071
Deferred revenue 15,058 12,093
Deferred taxes (14,103) 19
In-process research and development 39,700 9,200
Net change in assets and liabilities:
Accounts receivable (3,316) (3,998)
Prepaid expenses and other (3,029) (2,830)
Other assets (1,747) (564)
Accounts payable and accrued liabilities 10,149 3,170
Income taxes payable 902 2,026
--------- ---------
Net cash provided by operating activities 69,592 58,729
--------- ---------
Cash flows from investing activities:
Change in short-term investments (93,784) (91,049)
Purchases of property and equipment (27,987) (13,937)
Purchase of technology (11,500) --
Purchase of long-term investment (17,500) --
Capitalization of software development costs (750) (750)
Purchase of business, net of cash acquired -- (5,485)
--------- ---------
Net cash used in investing activities (151,521) (111,221)
--------- ---------
Cash flows from financing activities:
Principal payments on debt obligations (2,990) --
Proceeds from sale of common stock, net 21,964 15,349
Purchases of treasury stock (6,555) --
--------- ---------
Net cash provided by financing
activities 12,419 15,349
--------- ---------
Effect of exchange rate changes on cash (103) 598
--------- ---------
Net decrease in cash and cash equivalents (69,613) (36,545)
Cash and cash equivalents, beginning of period 91,193 95,600
--------- ---------
Cash and cash equivalents, end of period $ 21,580 $ 59,055
========= =========
Supplemental Disclosure:
Cash paid during the period for:
Interest $ 509 $ 212
========= =========
Income taxes $ 12,805 $ 350
========= =========
Non-cash transactions:
Purchase of technology for notes $ 28,500 $ --
========= =========
</TABLE>
See accompanying notes
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments which in the
opinion of management are necessary to fairly state the Company's and its
subsidiaries' condensed consolidated financial position, the results of
their operations, and their cash flows for the periods presented. This
report on Form 10-Q should be read in conjunction with the Company's
Financial Report included in the Annual Report to Stockholders for the year
ended September 30, 1995. For financial reporting purposes, the Company
reports on a 13-week quarter and a 52 or 53-week year. For presentation
purposes, the consolidated financial statements refer to the quarter's
calendar month end. The consolidated results of operations for the period
ended June 30, 1996 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year.
2. Earnings per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of common stock issuable upon
exercise of stock options and warrants using the treasury stock method.
3. On August 14, 1995, the Company announced a two-for-one stock split of its
common stock payable in the form of a stock dividend which was distributed
on September 8, 1995, to holders of record on August 25, 1995. On March 1,
1996, the Company's Amended and Restated Certificate of Incorporation was
amended to increase the number of shares the Company is authorized to issue
from 50,000,000 to 100,000,000 shares. Fiscal 1995 per share and authorized
amounts have been restated to reflect the stock split and amendment of the
Certificate of Incorporation.
4. On February 1, 1996, the Company and International Business Machines
Corporation ("IBM") entered into a six-year Joint Development and License
Agreement Concerning EDA Software and Related Intellectual Property (the
"Agreement"). Pursuant to the Agreement, the Company acquired certain
in-process research and development technology and a non-exclusive license
to sublicense and to use certain existing IBM electronic design automation
("EDA") technology and the underlying intellectual property, and licensed
certain of its EDA-related intellectual property to IBM. In addition, the
Company and IBM will jointly develop new EDA products in the areas of
synthesis, test methodology, design planning and static timing sign-off.
The Company will have sole ownership of synthesis products and the
exclusive right to market test, design planning and static timing products
(subject to certain rights of IBM upon termination of the Agreement). In
accordance with the agreement, the Company paid IBM $11 million in cash and
issued $30 million in notes, which bear interest at 3%, and are payable to
IBM upon the earlier of achievement of scheduled milestones or at maturity
in 2006. The Company will also pay royalties on revenues from the sale of
new products developed pursuant to the Agreement. As a result of the
transaction, the Company incurred an in-process research and development
charge of $39.7 million.
5. On May 7, 1996, the Company and Cooper and Chyan Technology, Inc. (CCT), a
developer of routing technology for printed circuit boards and integrated
circuits, announced that they had signed agreements to enter into a
strategic relationship. As part of this strategic relationship, the Company
purchased 1,206,542 shares, approximately 9.9 percent of the outstanding
shares of CCT, for $14.50 per share. In accordance with FASB Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
the investment has been classified as "available for sale," and a net
unrealized gain of $5.3 million was recorded as a separate component of
stockholders' equity during the third quarter.
6
<PAGE> 7
SYNOPSYS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Revenue for the third quarter of fiscal 1996 increased 34% to $91.0 million from
$68.1 million in the third quarter of fiscal 1995. Revenue for the first nine
months of fiscal 1996 increased 33% to $255.0 million from $192.0 million for
the comparable period in fiscal 1995. This increase in revenue was primarily
attributable to increased worldwide licensing and sales of the Company's
software and systems products. Product revenue as a percentage of total revenue
decreased to 64% and 66% in the third quarter and first nine months of fiscal
1996, respectively, compared to 69% and 68% in the same periods of fiscal 1995.
This decrease was due in part to an increase in service revenue from training
and consulting services during the third quarter of fiscal 1996.
International revenue as a percentage of total revenue decreased slightly to 50%
in the first nine months of fiscal 1996 from 51% in the first nine months of
fiscal 1995. This decrease was primarily due to decreased revenue in Japan as a
percentage of total revenue, principally attributable to a decline in the value
of the yen versus the dollar.
Cost of revenue as a percentage of total revenue was relatively flat at 12% in
the third quarter of fiscal 1996 compared to 11% in the third quarter of fiscal
1995, and 11% in the first nine months of fiscal 1996 compared to 12% in the
first nine months of fiscal 1995. Cost of revenue includes personnel and related
costs, production costs and amortization of capitalized software development and
purchased software costs.
Research and development expenses as a percentage of total revenue increased to
24% in the third quarter of fiscal 1996 from 22% in the third quarter of fiscal
1995, and increased in absolute dollars to $21.9 million from $15.3 million.
Research and development expenses as a percentage of total revenue increased to
24% in the first nine months of fiscal 1996 from 22% in the first nine months of
fiscal 1995, and increased in absolute dollars to $60.6 million from $42.0
million. Increased research and development expenses reflect the Company's
commitment to invest in product development and are primarily attributable to
personnel increases.
Sales and marketing expenses as a percentage of total revenue decreased to 37%
in the third quarter of fiscal 1996 from 38% in the third quarter of fiscal
1995, but increased in absolute dollars to $34.0 million from $26.2 million.
Sales and marketing expenses as a percentage of total revenue decreased to 38%
in the first nine months of fiscal 1996 from 39% in the first nine months of
fiscal 1995, but increased in absolute dollars to $97.0 million from $74.3
million. Total sales and marketing expenses increased as a result of continued
expansion of the Company's worldwide sales and marketing organizations, and
higher commissions and bonuses associated with increased revenue.
General and administrative expenses as a percentage of total revenue remained
constant at 8% in the third quarter of fiscal 1996 and in the third quarter of
fiscal 1995, but increased in absolute dollars to $7.0 million from $5.8
million. General and administrative expenses as a percentage of total revenue
remained constant at 8% in the first nine months of fiscal 1996 and fiscal 1995,
but increased in absolute dollars to $19.8 million from $16.2 million. This
increase in total expenses was due principally to personnel increases and
investments in management information and control systems.
7
<PAGE> 8
The provision for income taxes as a percentage of income decreased to 34% in the
third quarter and first nine months of fiscal 1996 from 36% and 37% in the third
quarter and first nine months of fiscal 1995, respectively. The decrease in the
Company's tax rate was primarily due to a decrease in nondeductible expenses
partially offset by the lapse of the U.S. federal research tax credit.
Net income increased to $12.7 million in the third quarter of fiscal 1996 from
$3.7 million in the third quarter of 1995. For the first nine months of fiscal
1996, net income was $10.0 million compared to $19.8 million in the first nine
months of fiscal 1995. The Company incurred an in-process research and
development charge of $39.7 million in the second quarter of fiscal 1996, in
connection with the acquisition of certain IBM technology. In the third quarter
of fiscal 1995, the Company incurred an in-process research and development
charge of $9.2 million, in connection with the acquisition of Arkos Design
Systems.
The Company's book-to-bill ratio for the third quarter of fiscal 1996 was
greater than one-to-one. The book-to-bill ratio measures the ratio of accepted
orders to revenue.
Liquidity and Capital Resources
For the first nine months of fiscal 1996, cash and short-term investments
increased $24.2 million to $234.2 million. The increase in cash and short-term
investments is due primarily to cash generated from operations, partially offset
by cash used to repurchase common stock and to purchase long-term assets.
The Company believes that the existing cash and short-term investments balance
of $234.2 million and anticipated cash flow from operations will be sufficient
to meet its currently anticipated liquidity and capital expenditure requirements
for at least the next twelve months.
Factors that Could Cause Actual Results to Differ Materially
from Those Projected
When used in the following discussion, the words "projects", "expects" and
similar expressions are intended to identify forward-looking statements. Such
statements, and the Company's results, are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from those projected or estimated.
The Company's future success depends upon its ability to enhance current
products and to develop and introduce new products that keep pace with
technological developments and address the increasingly sophisticated needs of
its customers. Much of the Company's growth has been attributable to the
strength of its synthesis products, a market segment in which the Company is
currently the leading supplier. Opportunities for growth in market share in this
segment are limited.
The Company is seeking to develop a balanced product portfolio. Among the most
important new products offered by the Company are its Behavioral Compiler and
Cell Based Array products. These products have achieved initial market
acceptance, but the Company will only derive significant revenue from these
products if they are accepted by a broad range of customers, which cannot be
assured. The Company is developing new products in the areas of design planning,
simulation and emulation, market segments in which the Company is not currently
the market leader and faces significant entrenched competition.
The electronic design automation (EDA) industry is highly competitive. The
Company's products compete with similar products from other vendors and compete
with other EDA products and services for a share of the EDA budgets of their
customers. The EDA industry as a whole may experience pricing and margin
pressure as a result of changes in the overall
8
<PAGE> 9
computing environment, such as faster and multiple processing CPUs, high-speed
networks, and Internet-based software distribution. Such competition may
adversely affect the Company's operating results and financial condition.
The Company's business has benefited from the rapid worldwide growth of the
semiconductor industry. The rate of growth of the semiconductor industry has
slowed in recent quarters, and the outlook for the remainder of 1996 is
uncertain. Slower growth in the semiconductor industry could have an adverse
effect on the Company's performance.
In February 1996, the Company entered into a six-year joint development and
license agreement with International Business Machines Corporation (IBM),
pursuant to which the Company and IBM will jointly develop certain new products
that the Company believes are important to the long-term growth of its business.
The Company has not previously entered into a joint development agreement of
this scope. Joint development of products is subject to risks and uncertainties
over and above those affecting internal development, and there can be no
assurance that the Company's joint development efforts will be successful.
The Company's success is dependent on the technical and other contributions of
key individuals, and there can be no assurance that the Company can continue to
recruit and retain such key personnel.
The Company attempts to manage its business to achieve quarter-to-quarter
revenue and earnings growth. The ability to manage such growth is affected by a
number of factors, including customer product demand, product license terms, the
size of the Company's backlog and decisions regarding the timing of revenue
recognition. In recent years, the management of revenue and earnings growth has
become more difficult as a result of a number of factors. The Company's orders
have become more seasonal, with higher volumes in the second and fourth quarters
of the Company's fiscal year, and disproportionately weighted toward the latter
part of the quarter. The average order size has also increased. In addition, the
sale of time-based product licenses, which result in revenue being recognized
evenly over the term of the license rather than at the time of sale, has grown.
For a given quarter it is possible for the Company to maintain steady revenue
and earnings growth while experiencing a slower rate of orders growth.
Conversely, it is also possible for the Company to experience rapid orders
growth while experiencing a slower rate of revenue and earnings growth.
Ultimately, long term revenue and earnings growth is dependent upon the
successful development and sale of the Company's products and services over a
sustained period of time.
In recent years, international revenue has accounted for approximately half of
the Company's revenue. As a result, the Company's financial performance could be
negatively affected by such factors as changes in foreign currency exchange
rates and changes in regional or worldwide economic or political conditions. In
particular, revenue from sales in Japan during fiscal 1996 has been adversely
affected by a decline in the value of the yen against the dollar. Continued
weakness in the value of the yen would adversely affect revenue from Japan
during the fourth quarter of fiscal year 1996 and beyond.
The Company's operating expenses are based in part on its expectations of future
revenue, and expense levels are generally committed in advance of revenue. The
Company continues to expand and increase its operating expenses in order to
generate and support additional revenue in the future. If revenue does not
materialize as expected, the Company's results of operations are likely to be
adversely affected. Net income may be disproportionately affected by a reduction
in revenue because only a small portion of the Company's expenses varies with
its revenue.
The Company is currently engaged in a major project to upgrade its
enterprise-wide database and information management systems, based principally
on software from SAP AG. In recent years, some software and computer systems
companies undertaking major systems
9
<PAGE> 10
transitions have experienced significant disruption as a result of unexpected
delays in the implementation of these projects. There can be no assurance that
the Company's project will be completed within the projected time frame or
within budget.
The Company's stock price, like that of other technology companies, is subject
to significant volatility. Past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. If revenues
or earnings in any quarter fail to meet expectations of the investment
community, there could be an immediate and significant impact on the Company's
stock price. In addition, the Company's stock price may be affected by broader
market trends that may be unrelated to the Company's performance.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the recorded amounts of assets and liabilities, disclosure of those
assets and liabilities at the date of the financial statements and the recorded
amounts of expenses during the reporting period. A change in the facts and
circumstances surrounding these estimates could result in a change to the
estimates and impact future operating results.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
11
<PAGE> 12
SYNOPSYS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 7, 1996 SYNOPSYS, INC.
-----------------------------
(Registrant)
By: /s/ Gregory C. Walker
--------------------------
Gregory C. Walker
Vice President, Finance
(Principal Financial and Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000883241
<NAME> SYNOPSYS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 21,580
<SECURITIES> 212,575
<RECEIVABLES> 48,992
<ALLOWANCES> 2,493
<INVENTORY> 0
<CURRENT-ASSETS> 303,908
<PP&E> 85,851
<DEPRECIATION> 40,611
<TOTAL-ASSETS> 383,610
<CURRENT-LIABILITIES> 149,837
<BONDS> 17,804
0
0
<COMMON> 403
<OTHER-SE> 215,566
<TOTAL-LIABILITY-AND-EQUITY> 383,610
<SALES> 255,000
<TOTAL-REVENUES> 255,000
<CGS> 28,069
<TOTAL-COSTS> 28,069
<OTHER-EXPENSES> 217,031
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 958
<INCOME-PRETAX> 15,150
<INCOME-TAX> 5,128
<INCOME-CONTINUING> 10,022
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,022
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
