================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1 TO
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 January 31, 2001
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 Number)
700 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
TELEPHONE: (650) 584-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
61,026,347 shares of Common Stock as of March 10, 2001
EXPLANATORY NOTE
This amendment is being filed to add additional disclosures in Management's
Discussion and Analysis and Results of Operations and the Unaudited Condensed
Consolidated Financial Statements and notes thereto.
================================================================================
Synopsys, Inc.
Quarterly Report on Form 10-Q
January 31, 2001
Table of Contents
PART I. FINANCIAL INFORMATION............................................... 3
ITEM 1. FINANCIAL STATEMENTS................................................ 3
CONDENSED CONSOLIDATED BALANCE SHEETS............................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS..................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS..................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........... 22
PART II. OTHER INFORMATION................................................... 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 22
SIGNATURES....................................................................... 23
PART I
Item 1. Financial Statements
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JANUARY 31, OCTOBER 31,
2001 2000
-----------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 199,568 $ 153,120
Short-term investments 129,354 282,519
-----------------------------
Total cash, cash equivalents and short-term investments 328,922 435,639
Accounts receivable, net of allowances of $10,374, and $9,539,
respectively 145,247 146,449
Prepaid expenses, deferred taxes and other 99,352 102,433
-----------------------------
Total current assets 573,521 684,521
Property and equipment, net 162,558 157,243
Long-term investments 128,228 126,741
Intangible assets, net 48,014 51,776
Other assets 43,290 30,712
-----------------------------
Total assets $ 955,611 $ 1,050,993
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 95,506 $ 139,290
Current portion of long-term debt 3,520 6,416
Accrued income taxes 43,032 56,304
Deferred revenue 220,373 150,654
-----------------------------
Total current liabilities 362,431 352,664
Long-term debt 504 564
Deferred compensation 19,744 14,936
Other liabilities 3,915 --
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
no shares outstanding -- --
Common stock, $.01 par value; 400,000,000 shares authorized;
60,743,817, and 62,877,288 shares outstanding, respectively 608 629
Additional paid-in capital 561,668 558,716
Retained earnings 408,042 405,419
Treasury stock, at cost (438,907) (329,493)
Accumulated other comprehensive income 37,606 47,558
-----------------------------
Total stockholders' equity 569,017 682,829
-----------------------------
Total liabilities and stockholders' equity $ 955,611 $ 1,050,993
=============================
The accompanying notes are an integral part of these financial statements.
3
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS ENDED
JANUARY 31,
2001 2000
-------------------------
Revenue:
Product $ 39,192 $ 130,549
Service 86,969 86,319
Ratable license 30,993 --
-------------------------
Total revenue 157,154 216,868
Cost of revenue:
Product 6,685 10,286
Service 19,196 18,599
Ratable license 6,175 --
-------------------------
Total cost of revenue 32,056 28,885
-------------------------
Gross margin 125,098 187,983
Operating expenses:
Research and development 46,221 44,267
Sales and marketing 69,579 66,996
General and administrative 16,689 12,249
Amortization of intangible assets 4,172 3,521
In-process research and development -- 1,750
-------------------------
Total operating expenses 136,661 128,783
-------------------------
Operating (loss) income (11,563) 59,200
Other income, net 25,481 8,940
-------------------------
Income before provision for income taxes 13,918 68,140
Provision for income taxes 4,454 23,037
-------------------------
Net income $ 9,464 $ 45,103
=========================
Basic earnings per share $ 0.15 $ 0.64
=========================
Weighted average common shares outstanding 61,901 70,785
=========================
Diluted earnings per share $ 0.15 $ 0.61
=========================
Weighted average common shares and
dilutive stock options outstanding 65,243 74,281
=========================
The accompanying notes are an integral part of these financial statements.
4
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED
JANUARY 31,
2001 2000
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,464 $ 45,103
Adjustments to reconcile net income to cash flows
provided by operating activities:
Depreciation and amortization 15,716 14,302
Tax benefit associated with stock options 2,985 8,800
Provision for doubtful accounts and sales returns 1,202 (1,912)
Interest accretion on notes payable 188 198
Deferred taxes -- (4,359)
Gain on sale of long-term investments (10,411) (1,969)
Gain on sale of silicon libraries business (10,580) --
In-process research and development -- 1,750
Net changes in operating assets and liabilities:
Accounts receivable -- (23,869)
Prepaid expenses, deferred taxes and other (3,391) (1,700)
Other assets (4,359) (5,861)
Accounts payable and accrued expenses (47,383) (18,842)
Accrued income taxes (13,272) 2,640
Deferred revenue 69,774 9,369
Deferred compensation 4,808 6,577
-------------------------
Net cash provided by operating activities 14,741 30,227
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (18,254) (11,715)
Purchases of short-term investments (515,295) (597,140)
Proceeds from sales and maturities of short-term investments 668,460 568,372
Purchases of long-term investments (6,000) (7,998)
Proceeds from sale of long-term investments 22,814 2,868
Proceeds from the sale of silicon libraries business 4,122 --
Acquisitions, net of cash acquired -- (5,646)
Intangible assets, net (410) (212)
Capitalization of software development costs (250) (250)
-------------------------
Net cash provided by (used in) investing activities 155,187 (51,721)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt obligations (3,083) (7,125)
Issuances of long-term debt -- 727
Issuances of common stock 28,234 24,219
Purchase of treasury stock (144,544) (82,975)
-------------------------
Net cash used in financing activities (119,393) (65,154)
Effect of exchange rate changes on cash (4,087) (504)
-------------------------
Net increase (decrease) in cash and cash equivalents 46,448 (87,152)
Cash and cash equivalents, beginning of period 153,120 309,394
-------------------------
Cash and cash equivalents, end of period $ 199,568 $ 222,242
=========================
The accompanying notes are an integral part of these financial statements.
5
SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Synopsys, Inc. ("Synopsys" or the "Company") is a leading supplier of
electronic design automation ("EDA") software to the global electronics
industry. The Company develops, markets, and supports a wide range of integrated
circuit ("IC") design products that are used by designers of advanced ICs,
including system-on-a-chip ICs, and the electronic systems (such as computers,
cell phones, and internet routers) that use such ICs. The Company also provides
consulting services to help its customers improve their IC design processes and,
where requested, to assist them with their IC designs.
The Company has a fiscal year that ends on the Saturday nearest October 31.
Fiscal 2000 was a 52-week year and fiscal 2001 will be a 53-week year. For
presentation purposes, the condensed consolidated financial statements and notes
refer to the calendar month end.
The unaudited condensed consolidated financial statements include the
accounts of Synopsys and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations of the Company have been made. Operating results for the interim
periods are not necessarily indicative of the results which may be expected for
any future period or the full fiscal year. The condensed consolidated financial
statements and notes included herein should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
October 31, 2000, included in the Company's 2000 Annual Report on Form 10-K.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the recorded amounts reported in the
unaudited condensed consolidated financial statements and accompanying notes. A
change in the facts and circumstances surrounding these estimates could result
in a change to the estimates and impact future operating results.
REVENUE RECOGNITION AND COST OF REVENUE. Revenue consists of fees for
perpetual and time based licenses of the Company's software products, sales of
hardware system products, post-contract customer support (PCS), customer
training and consulting. The Company classifies its revenues as product, service
or ratable licenses. Product revenue consists primarily of perpetual and
non-ratable time-based license revenue. Service revenue consists of PCS under
perpetual and non-ratable time-based licenses and consulting services. Ratable
license revenue is all fees related to time based licenses bundled with
post-contract customer support (PCS) and sold as a single package (commonly
referred to by the Company as a "Technology Subscription License" or TSL) and
time-based licenses that included extended payment terms or unspecified
additional products.
Cost of product revenue includes cost of production personnel, product
packaging, documentation, amortization of capitalized software development costs
and purchased technology, and costs of the Company's systems products. Cost of
service revenue includes personnel and the related costs associated with
providing training, consulting and PCS. Cost of ratable licenses revenue
includes the costs of products and services related to time-based licenses
bundled with PCS and sold as a single package.
The Company recognizes revenue in accordance with SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-9 and SOP 98-4 and generally recognizes
revenue when all of the following criteria are met as set forth in paragraph 8
of SOP 97-2:
- Persuasive evidence of an arrangement exists,
- Delivery has occurred,
- The vendor's fee is fixed or determinable, and
- Collectibility is probable.
6
The Company defines each of the four criteria above as follows:
Persuasive Evidence of an Arrangement Exists. It is the Company's customary
practice to have a written contract, which is signed by both the customer and
Synopsys, or a purchase order from those customers that have previously
negotiated a standard end user license arrangement or volume purchase
agreement, prior to recognizing revenue on an arrangement.
Delivery Has Occurred. The Company's software may be either physically or
electronically delivered to its customers. For those products that are
delivered physically, the Company's standard transfer terms are FOB shipping
point. For an electronic delivery of software, delivery is considered to have
occurred when the customer has been provided with the access codes that allow
the customer to take immediate possession of the software on its hardware.
If undelivered products or services exist in an arrangement that are
essential to the functionality of the delivered product, delivery is not
considered to have occurred.
The Vendor's Fee is Fixed or Determinable. The fee the Company's customers
pay for our products is negotiated at the outset of an arrangement, and is
generally based on the specific volume of product to be delivered. The
Company's license fees are not a function of variable-pricing mechanisms such
as the number of units distributed or copied by the customer, or the expected
number of users in an arrangement. Therefore, except in cases where the
Company grants extended payment terms to a specific customer, the Company's
fees are considered to be fixed or determinable at the inception of our
arrangements.
The Company's typical payment terms are such that a minimum of 75% of the
arrangement revenue is due within one year or less. Arrangements with payment
terms extending beyond the typical payment terms are considered not to be
fixed or determinable. Revenue from such arrangements is recognized at the
lesser of the aggregate of amounts due and payable or the amount of the
arrangement fee that would have been recognized if the fees had been fixed or
determinable.
Collectibility is Probable. Collectibility is assessed on a
customer-by-customer basis. The Company typically sells to customers from
which there is a history of successful collection. New customers are
subjected to a credit review process, which evaluates the customers'
financial positions and ultimately their ability to pay. New customers are
typically assigned a credit limit based on a formulated review of their
financial position. Such credit limits are only increased after a successful
collection history with the customer has been established. If it is
determined from the outset of an arrangement that collectibility is not
probable based upon the Company's credit review process, revenue is
recognized on a cash-collected basis.
Multiple Element Arrangements. The Company allocates revenue on software
arrangements involving multiple elements to each element based on the
relative fair values of the elements. The Company's determination of fair
value of each element in multiple element arrangements is based on
vendor-specific objective evidence (VSOE). The Company limits its assessment
of VSOE for each element to the price charged when the same element is sold
separately.
The Company has analyzed all of the elements included in its multiple-element
arrangements and determined that it has sufficient VSOE to allocate revenue to
the PCS components of its perpetual license products and consulting.
Accordingly, assuming all other revenue recognition criteria are met, revenue
from perpetual licenses is recognized upon delivery using the residual method in
accordance with SOP 98-9, and revenue from PCS is recognized ratably over the
PCS term. The Company recognizes revenue from technology subscription licenses
(TSLs) over the term of the ratable license period, as the license and PCS
portions of a TSL are bundled and not sold separately. Revenue from contracts
with extended payment terms are recognized as the lesser of amounts due and
payable or the amount of the arrangement fee that would have been recognized if
the fee were fixed or determinable.
Certain of the Company's time-based licenses include unspecified additional
products. The Company recognizes revenue from time-based licenses that include
both unspecified additional software products and extended payment terms that
are not considered to be fixed or determinable in an amount that is the lesser
of amounts due and payable or the ratable portion of the entire fee. Revenue
from contracts with unspecified additional software products is recognized
ratably over the contract term.
7
Consulting Services. The Company provides design methodology assistance,
specialized services relating to telecommunication systems design and
generalized turnkey design services. The Company's consulting services generally
are not essential to the functionality of the software. The Company's software
products are fully functional upon delivery and implementation does not require
any significant modification or alteration. The Company's services to its
customers often include assistance with product adoption and integration and
specialized design methodology assistance. Customers typically purchase these
professional services to facilitate the adoption of the Company's technology and
dedicate personnel to participate in the services being performed, but they may
also decide to use their own resources or appoint other professional service
organizations to provide these services. Software products are billed separately
and independently from consulting services, which are generally billed on a
time-and-materials or milestone-achieved basis. The Company generally recognizes
revenue from consulting services as the services are performed.
Exceptions to the general rule above involve arrangements where the Company
has committed to significantly alter the features and functionality of its
software or build complex interfaces necessary for the Company's software to
function in the customer's environment. These types of services are considered
to be essential to the functionality of the software. Accordingly, contract
accounting is applied to both the software and service elements included in
these arrangements.
ADOPTION OF SFAS 133. On November 1, 2000, Synopsys adopted Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138. SFAS
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives be recognized as
either assets or liabilities at fair value. Derivatives that are not designated
as hedging instruments are adjusted to fair value through earnings. If the
derivative is designated as a hedging instrument, depending on the nature of the
exposure being hedged, changes in fair value will either be offset against the
change in fair value of the hedged asset, liability, or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of the hedge is recognized in
earnings immediately. Upon adoption on November 1, 2000, the cumulative
transition adjustment was insignificant. The Company does not believe that
ongoing application of SFAS 133 will significantly alter the Company's hedging
strategies. However, its application may increase the volatility of other income
and expense and other comprehensive income.
FOREIGN EXCHANGE CONTRACTS. The Company operates internationally and thus is
exposed to potentially adverse movements in foreign currency rate changes. The
Company has entered into foreign exchange forward contracts to reduce its
exposure to foreign currency rate changes on non-functional currency denominated
balance sheet positions. The objective of these contracts is to neutralize the
impact of foreign currency exchange rate movements on the Company's operating
results.
These contracts require the Company to exchange currencies at rates agreed
upon at the inception of the contracts. These contracts reduce the exposure to
fluctuations in exchange rate movements because the gains and losses associated
with foreign currency balances and transactions are generally offset with the
gains and losses of the hedge contracts. Because the impact of movements in
currency exchange rates on forward contracts offsets the related impact on the
underlying items being hedged, these financial instruments help alleviate the
risk that might otherwise result from changes in currency exchange rates.
2. SALE OF SILICON LIBRARIES BUSINESS
On January 4, 2001, the Company sold the assets of the Company's silicon
libraries business to Artisan Components, Inc. ("Artisan") for a total sales
price of $15.5 million, including common stock with a fair value of $11.4
million on the date of sale, and cash of $4.1 million. The net book value of the
assets sold was $1.4 million. In connection with the sale, the Company has
subcontracted certain performance obligations under existing contracts to
Artisan. The Company has estimated the costs associated with the completion of
these subcontract agreements to be approximately $750,000. Expenses incurred in
connection with the sale were $2.8 million. The Company recorded a gain on the
sale of the business of $10.6 million, which is included in other income, net on
the accompanying unaudited condensed consolidated statement of operations.
Direct revenue for the silicon libraries business was $0.2 million and $0.9
million in the first three months of 2001 and 2000, respectively. Direct revenue
for this business was $4.3 million in fiscal 2000.
8
3. STOCK REPURCHASE PROGRAM
In August 2000, the Company established a stock repurchase program under
which Synopsys common stock with an aggregate market value up to $500 million
may be acquired in the open market. Common shares repurchased are intended to be
used for ongoing stock issuances under the Company's employee stock plans and
for other corporate purposes. Under the share repurchase program, for the
three-month period ended January 31, 2001, the Company purchased 3.0 million
shares of Synopsys common stock in the open market, at an average price of $48
per share. For the three month period ended January 31, 2000, the Company
purchased 1.3 million shares of Synopsys common stock in the open market under a
prior share repurchase program, at an average price of $62 per share. As of
January 31, 2001, $169.3 million remains available for future common stock
repurchases.
4. COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income, net of
income tax expense:
THREE MONTHS ENDED
JANUARY 31,
(in thousands) 2001 2000
-----------------------
Net income $ 9,464 $ 45,103
Foreign currency translation adjustment (4,087) (504)
Unrealized (loss) gain on investments (15,077) 10,946
Reclassification adjustment for realized gain on investments 9,212 (1,182)
-----------------------
Total comprehensive income $ (488) $ 54,363
=======================
Included in unrealized loss on investments in the three month period ended
January 31, 2001 are losses on derivative instruments qualifying as cash flow
hedges of $57.1 million, which are offset by the unrealized gains on the
underlying securities of $57.9 million.
The reclassification adjustment adjusts current period comprehensive income
for gains on available-for-sale securities that were realized in income in the
current period that had also been included in other comprehensive income as
unrealized holding gains in the period in which such unrealized gains arose.
9
5. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common shares and dilutive
employee stock options outstanding during the period. The dilutive effect of the
weighted-average number of employee stock options outstanding is computed using
the treasury stock method.
The following table sets forth the computation of basic and diluted earnings
per share:
THREE MONTHS ENDED
JANUARY 31,
(in thousands, except per share amounts) 2001 2000
----------------------
Numerator:
Numerator for basic and diluted earnings per share:
Net income $ 9,464 $ 45,103
======================
Denominator:
Denominator for basic earnings per share:
Weighted-average common shares outstanding 61,901 70,785
Effect of dilutive employee stock options 3,342 3,496
----------------------
Diluted common shares 65,243 74,281
======================
Basic earnings per share $ 0.15 $ 0.64
======================
Diluted earnings per share $ 0.15 $ 0.61
======================
The effect of dilutive employee stock options excludes approximately
4,025,000 and 76,000 stock options at January 31, 2001 and 2000, respectively,
which were antidilutive for earnings per share calculations.
6. SEGMENT DISCLOSURE
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires disclosures of certain information regarding operating
segments, products and services, geographic areas of operation and major
customers. The method for determining what information to report under SFAS No.
131 is based upon the "management approach," or the way that management
organizes the operating segments within a company, for which separate financial
information is available that is evaluated regularly by the Chief Operating
Decision Maker (CODM) in deciding how to allocate resources and in assessing
performance. Synopsys' CODM is the Chief Executive Officer and Chief Operating
Officer.
The Company provides comprehensive design technology products and consulting
services in the EDA software industry. The CODM evaluates the performance of the
Company based on profit or loss from operations before income taxes excluding
merger-related costs, in-process research and development and amortization of
intangible assets. For the purpose of making operating decisions, the CODM
primarily considers financial information presented on a consolidated basis
accompanied by disaggregated information about revenues by geographic region.
There are no differences between the accounting policies used to measure profit
and loss for the Company segment and those used on a consolidated basis. Revenue
is defined as revenues from external customers.
10
The disaggregated financial information reviewed by the CODM is as follows:
THREE MONTHS ENDED
JANUARY 31,
(in thousands) 2001 2000
-------------------------
Revenue:
Product $ 39,192 $ 130,549
Service 86,969 86,319
Ratable license 30,993 --
-------------------------
Total revenue $ 157,154 $ 216,868
=========================
Gross margin $ 125,098 $ 187,983
Operating (loss) income before amortization
of intangible assets, merger-related costs,
and in-process research and development $ (7,391) $ 64,471
Reconciliation of the Company's segment profit and loss to the Company's
operating (loss) income is as follows:
THREE MONTHS ENDED
JANUARY 31,
(in thousands) 2001 2000
-----------------------
Operating (loss) income before amortization
of intangible assets, merger-related costs
and in-process research and development $ (7,391) $ 64,471
Amortization of intangible assets 4,172 3,521
Merger-related costs and in-process research
and development -- 1,750
-----------------------
Operating (loss) income $(11,563) $ 59,200
=======================
11
Revenue and long-lived assets related to operations in the United States and
other geographic areas are as follows:
THREE MONTHS ENDED
JANUARY 31,
(in thousands) 2001 2000
-------------------------
Revenue:
United States $ 105,945 $ 151,868
Europe 27,500 39,700
Japan 16,900 24,900
Other 18,000 16,100
Transfers between geographic areas (11,191) (15,700)
-------------------------
Consolidated $ 157,154 $ 216,868
=========================
JANUARY 31, OCTOBER 31,
(in thousands) 2001 2000
---------------------------
Long-lived assets:
United States $ 149,958 $ 140,923
Other 12,600 16,320
-------------------------
Consolidated $ 162,558 $ 157,243
=========================
Transfers between geographic areas represent intercompany revenue accounted
for at prices representative of unaffiliated party transactions and export
shipments directly to customers.
Geographic revenue data for multi-region, multi-product transactions reflect
internal allocations and is therefore subject to certain assumptions and the
Company's methodology. Revenue is not reallocated among geographic regions to
reflect any re-mixing of licenses between different regions following the
initial product shipment.
The Company segregates revenue into five categories for purposes of internal
management reporting: IC Implementation, including both the Design Compiler (DC)
Family and Physical Synthesis; Verification and Test; Intellectual Property (IP)
and System Level Design; Transistor Level Design; and Synopsys Professional
Services. Revenue for each of the categories is as follows:
THREE MONTHS ENDED
JANUARY 31,
(in thousands) 2001 2000
----------------------
Revenue:
IC Implementation
DC Family $ 53,845 $ 79,442
Physical Synthesis 6,160 5,132
Verification and Test 44,222 64,248
IP and System Level Design 18,441 30,959
Transistor Level Design 13,465 16,942
Professional Services 21,021 20,145
----------------------
Consolidated $157,154 $216,868
======================
No single customer accounted for more than ten percent of the Company's
consolidated revenue in the first quarters of 2001 and 2000.
12
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company currently uses derivative instruments, designated as cash flow
hedges, to hedge the variability of cash flows attributable to the forcasted
sale of available-for-sale (AFS) securities accounted for under Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115). In accounting for a derivative designated
as a cash flow hedge, the effective portion of the change in fair value of the
derivative is initially recorded in other comprehensive income (OCI) and
reclassified into earnings when the hedged anticipated transaction affects
earnings. The ineffective portion of the change in the fair value of the
derivative is recognized in earnings immediately.
AFS investments accounted for under SFAS 115 are subject to market price
risk. From time to time, the Company enters into and designates forward
contracts to hedge variable cash flows from anticipated sales of these
investments. The Company's objective for entering into derivative contracts is
to lock in the price of selected equity holdings while maintaining the rights
and benefits of ownership until the anticipated sale occurs. The forecasted sale
selected for hedging is determined by market conditions, up-front costs, and
other relevant factors. The Company has generally selected forward sale
contracts to hedge these risks.
Changes in the spot rate of the forward sale contracts designated and
qualifying as cash flow hedges of the forecasted sale of AFS investments
accounted for under SFAS 115 are reported in OCI. The notional amount and the
underlying of the forward designated as the hedging instrument are equal to the
AFS securities being hedged. In addition, hedge effectiveness is assessed based
on the changes in spot prices. As such, the hedging relationship is perfectly
effective, both at inception of the hedge and on an on-going basis. The
difference between the spot price and the forward price, which is generally not
material, is reflected in other income.
During the three months ended January 31, 2001, the Company physically
settled certain forward contracts. The net gain on the forward contracts was
offset by the net loss on the related AFS investment since inception of the
hedge, with any gain or loss reclassified from OCI to other income.
The Company recorded a net realized gain on the sale of the
available-for-sale investments of $13.5 million, during the three-month period
ending January 31, 2001. These gains are exclusive of the hedge gains and losses
discussed above.
As of January 31, 2001, the Company has recorded a liability of $3.9 million
due to unrealized losses on forward contracts. As of January 31, 2001, the
Company has recorded $57.9 million in long-term investments due to unrealized
gains on the forward contracts. As of January 2001, the maximum length of time
over which the Company is hedging its exposure to the variability in future cash
flows associated with the forward sale contracts is 19 months.
8. EFFECT OF NEW ACCOUNTING STANDARDS
During fiscal 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. The objective of SAB 101 is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The Company is required to adopt
the guidance in SAB 101 no later than the fourth quarter of its fiscal year
2001. Adoption of this guidance is not expected to have a material impact on the
Company's financial position or results of operations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements include the statements concerning expected cash flows
from acquired technology, projections regarding acquired companies, effects of
foreign currency hedging, adequacy of the Company's cash as well as statements
including the words "projects," "expects," "believes," "anticipates" or similar
expressions. Actual results could differ materially from those anticipated in
such forward-looking statements as a result of certain factors, including those
set forth under "Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Sale of Silicon Libraries Business. On January 4, 2001, the Company sold the
assets of the Company's silicon libraries business to Artisan Components, Inc.
("Artisan") for a total sales price of $15.5 million, including common stock
with a fair value of $11.4 million on the date of sale, and cash of $4.1
million. The net book value of the assets sold was $1.4 million. In connection
with the sale, the Company has subcontracted certain performance obligations
under existing contracts to Artisan. The Company has estimated the costs
associated with the completion of these subcontract agreements to be
approximately $750,000. Expenses incurred in connection with the sale were $2.8
million. The Company recorded a gain on the sale of the business of $10.6
million, which is included in other income, and expense on the accompanying
unaudited condensed consolidated statement of operations. Direct revenue for the
silicon libraries business was $0.2 million and $0.9 million in the first three
months of 2001 and 2000, respectively. Direct revenue for this business was $4.3
million in fiscal 2000.
Revenue Recognition and Cost of Revenue. Revenue consists of fees for
perpetual and ratable licenses of the Company's software products, sales of
hardware system products, post-contract customer support (PCS), customer
training and consulting. The Company classifies its revenues as product, service
or ratable license. Product revenue consists primarily of perpetual and
non-ratable time-based license revenue. Service revenue consists of PCS under
perpetual and non-ratable time-based licenses and consulting services. Ratable
license revenue is all fees related to time based licenses bundled with
post-contract customer support (PCS) and sold as a single package (commonly
referred to by the Company as a "Technology Subscription License" or TSL) and
time-based licenses that included extended payment terms or unspecified
additional products.
Cost of product revenue includes cost of production personnel, product
packaging, documentation, amortization of capitalized software development costs
and purchased technology, and costs of the Company's systems products. Cost of
service revenue includes personnel and the related costs associated with
providing training, consulting and PCS. Cost of ratable licenses revenue
includes the costs of products and services related to time-based licenses
bundled with PCS and sold as a single package.
On July 31, 2000, Synopsys introduced TSLs, which are time-limited rights to
use Synopsys software. The terms of TSLs, and the payments due thereon, may be
structured flexibly to meet the needs of the customer. With minor exceptions,
under TSLs customers cannot obtain major new products developed or acquired
during the term of their license without making an additional purchase. TSLs are
structured so that both product and service revenue is generally recognized
ratably over the term of the license, or as payments become due. We expect that
the average duration of TSLs will be between two and a half and three years, and
the average duration of TSLs sold in the first quarter of fiscal 2001 fell
within that range. TSLs replaced the Company's prior form of time-based
licenses.
During the first quarter of fiscal 2001, new product orders consisted of
approximately 21% perpetual licenses and 79% TSLs. Synopsys believes that the
principal benefits of TSLs are that Synopsys will (i) be able to offer customers
technology and terms that more closely match their needs; (ii) have greater
visibility into our earnings stream; (iii) see improvements in the pricing
environment for our products; and (iv) be able to roll out our new technologies
in a more planned manner.
The replacement of time-based licenses by TSLs will impact our reported
revenue. Under a ratable license, relatively little revenue is recognized during
the quarter the product is delivered, and the remaining amount is recorded as
deferred revenue to be recognized over the term of the license. Under the prior
form of time-based license, generally all license revenue was recognized in the
quarter the product was delivered, with relatively little
14
recorded as deferred revenue. Therefore, an order for a TSL will result in much
less current-quarter revenue than an equal-sized order under the prior form of
time-based license.
As expected, the Company's total revenue for the first quarter of fiscal 2001
decreased 28% to $157.2 million compared to the first quarter of fiscal 2000,
primarily attributable to the adoption of TSLs, as described above.
Product revenue was $39.2 million in the first quarter of fiscal 2001,
compared to $130.5 million in the first quarter of fiscal 2000. The decrease in
fiscal 2001 is primarily due to the adoption of TSLs, which are now reported
separately as ratable license revenue, and the inherent decrease in revenue due
to the timing of revenue recognition under TSLs as described above. Ratable
license revenue, which includes all fees related to TSLs, was $31.0 million for
the first quarter of fiscal 2001. Service revenue was relatively flat at $87.0
million in the first quarter of fiscal 2001, as compared to $86.3 million in the
first quarter of fiscal 2000.
Revenue from international operations in the first quarter of fiscal 2001 was
$62.4 million compared to $80.7 million for the first quarter of fiscal 2000.
International revenue represented approximately 40% and 37% of total revenue for
the first quarter of fiscal 2001 and 2000, respectively. The increase as a
percent of total revenue is attributable to Asia Pacific as a result of the
geographic mix on particular contracts closed during the quarter.
REVENUE - PRODUCT GROUPS. For management reporting purposes, the Company's
software products have been organized into four distinct product groups -- IC
Implementation (composed of two product categories, Design Compiler (DC) Family
and Physical Synthesis), Verification and Test, IP and System Level Design,
Transistor Level Design, and a services group -- Synopsys(R) Professional
Services. The following table summarizes the performance of the various groups
as a percentage of total company revenue:
THREE MONTHS ENDED
JANUARY 31,
2001 2000
---------------------
Revenue:
IC Implementation
DC Family 34% 37%
Physical Synthesis 4% 2%
Verification and Test 28% 30%
IP and System Level Design 12% 14%
Transistor Level Design 9% 8%
Professional Services 13% 9%
---------------------
Total Company 100% 100%
=====================
IC Implementation. Included in the Physical Synthesis group are Physical
Compiler, a product introduced in fiscal 2000 that unifies synthesis, placement
and global routing, Chip Architect, the Company's chip floor-planning product,
Flex Route, the Company's high-level router, and the Company's detailed routing
technology. This product family contributed revenue of $6.2 million in the first
quarter of fiscal 2001 as compared to $5.1 million in the same quarter last
year. The Company expects increases in the revenue contribution from the
Physical Synthesis family in fiscal 2001 and future years. The decline in
revenue contribution percentage of the DC Family from the first quarter of
fiscal 2000 to fiscal 2001 principally reflects greater relative growth in
product groups other than the DC Family. It may also reflect the maturation of
the market for Design Compiler and the beginning of what we believe is a
transition from the DC Family to Physical Synthesis products, although the
relative revenue contribution from the DC Family should be expected to fluctuate
from quarter to quarter. For fiscal 2001 as a whole, the Company expects that
orders from the DC Family will be relatively flat; revenue will decline as a
result of the change in the Company's license strategy (see discussion in
Results of Operations - Revenue). Future revenue growth in the IC Implementation
product group is anticipated to come from the Physical Synthesis product family.
Verification and Test. Verification and Test includes the Company's
simulation, timing analysis, formal verification and test products. In the first
quarter of fiscal 2001, the Verification and Test product family contributed 28%
of our revenue, compared to 30% in the same quarter last year. The Company
expects demand for verification
15
products to increase as both semiconductor and systems companies encounter
increasingly difficult verification challenges as chipmaking technology advances
and ICs become more complex.
Intellectual Property and System Level Design (IP&SG). The Company's IP&SG
products include our DesignWare library of design components and verification
models, and system design products. Revenue contribution was 12% in the first
quarter of fiscal 2001, a slight decline from the same quarter last year. During
the first quarter of fiscal 2001, we sold our silicon libraries business to
Artisan.
Transistor Level Design. The Company's transistor level design products
include tools that are used in transistor-level simulation and analysis. Revenue
contribution was 9% in the first quarter of fiscal 2001, relatively flat
compared to the same quarter last year.
Professional Services. The Company's Professional Services group includes
consulting and training activities as well as the Internet design service
business. The Professional Services group provides a comprehensive portfolio of
consulting services covering all critical phases of the system-on-a-chip
development process, as well as systems development in wireless and broadband
applications. The increase in the total Company revenue contribution for this
services group from 9% in the first quarter of fiscal 2000 to 13% in fiscal 2001
is due largely to the increased demand for the Company's turnkey design and
wireless and broadband consulting services. The Company anticipates continued
growth in fiscal 2001.
Cost of Revenue. Cost of product revenue includes personnel and related
costs, production costs, product packaging, documentation, amortization of
capitalized software development costs and purchased technology, and costs of
the components of the Company's hardware system products. The cost of internally
developed capitalized software is amortized based on the greater of the ratio of
current product revenue to the total of current and anticipated product revenue
or the straight-line method over the software's estimated economic life of
approximately two years. Cost of product revenue was 17% of total product
revenue for the first quarter of fiscal 2001, as compared to 8% for the same
quarter last year. This increase is due primarily to the adoption of TSLs (see
Results of Operations - Revenue). Revenue from TSLs is recognized over the
period of a license rather than in the quarter the license is shipped.
Therefore, since the Company's product costs do not fluctuate significantly with
changes in revenue or changes in revenue recognition methods, this results in a
higher relative cost of revenue as a percent of total revenue.
Cost of service revenue includes personnel and the related costs associated
with providing training and consulting services. Cost of service revenue as a
percentage of total service revenue was relatively flat at 22% in both of the
first quarters of fiscal 2001 and 2000.
Since TSLs include bundled product and services, cost of ratable license
revenue includes the costs of product and services related to subscription and
time-based licenses. Cost of ratable license revenue in the first quarter of
fiscal 2001 was 20%.
The Company expects that the absolute dollar cost of revenue in fiscal 2001
will not increase materially from fiscal 2000. Cost of revenue in all categories
was affected by the fact that the first quarter of fiscal 2001 included an
additional week of operations due to the method by which we determine our fiscal
year.
Research and Development. Research and development expenses increased by 4%
to $46.2 million in the first fiscal quarter of fiscal 2001, from $44.3 million
in the same quarter of last year, both net of capitalized software development
costs. Research and development expenses represented 29% and 20% of total
revenue in the first fiscal quarter of 2001 and 2000, respectively. The increase
in the percentage as compared to total revenue is due to lower revenue resulting
from the changes to our license strategy. The increase in absolute dollars is
primarily a result of the additional week of operations in the first quarter of
fiscal 2001. The Company anticipates that it will continue to commit substantial
resources to research and development in the future, provided that it is able to
continue to hire and retain a sufficient number of qualified personnel. If the
Company believes that it is unable to enter a particular market in a timely
manner, it may license technology from other businesses or acquire other
businesses as an alternative to internal research and development.
Sales and Marketing. Sales and marketing expenses increased by 4% to $69.6
million in the first quarter of fiscal 2001 from $67.0 million in the same
quarter last year. Sales and marketing expenses represented 44% and 31% of total
revenue in the first fiscal quarter of 2001 and 2000, respectively. The increase
in absolute dollars in 2001 is
16
primarily due to increases in personnel related costs as a result of the
additional week of operation in the first quarter of fiscal 2001. The increase
as a percentage of revenue is due to lower revenue resulting from the changes to
our license strategy.
General and Administrative. General and administrative expenses increased to
$16.7 million in the first quarter of fiscal 2001, compared to $12.2 million in
the same quarter last year. As a percentage of total revenue, general and
administrative expenses were 11% and 6% in the first quarter of fiscal 2001 and
2000, respectively. The increase in absolute dollars from the first quarter of
fiscal 2000 to the first quarter of fiscal 2001, presented in order of
magnitude, was primarily due to increases in personnel costs and other costs as
a result of the additional week of operations in the first quarter, increased
facility costs and bad debt expense, and salary increases over the prior year.
The increase as a percentage of total revenue is primarily the result of the
higher expenditures coupled with lower revenue due to the change we made to our
license strategy.
Amortization of Intangible Assets. Intangible assets represent the excess of
the aggregate purchase price over the fair value of the tangible and
identifiable intangible assets acquired by the Company. Intangible assets,
including goodwill, are amortized over their estimated useful life of three to
five years. The Company assesses the recoverability of goodwill and other
intangible assets by estimating whether the unamortized cost will be recovered
through estimated future undiscounted cash flows. Amortization of intangible
assets charged to operations in the first quarter of fiscal 2001 was $4.2
million as compared to $3.5 million for the same quarter last year.
In-Process Research and Development. Purchased in-process research and
development (IPRD) of $1.7 million in the first quarter of fiscal 2000
represents the write-off of in-process technologies associated with our
acquisition of Leda, S.A. At the date of the acquisition, the projects
associated with the IPRD efforts had not yet reached technological feasibility
and the research and development in process had no alternative future uses.
Accordingly, this amount was expensed on the acquisition date.
Other Income, Net. Other income, net was $25.5 million in the first quarter
of fiscal 2001, as compared to $8.9 million in the same quarter last year. The
increase was due in part to the gain of $10.6 million on the sale of our silicon
libraries business to Artisan and in part to realized gains on investments,
which were $13.8 million in the first quarter of fiscal 2001 as compared to $2.0
million in the first quarter of fiscal 2000. Interest income in the first
quarter of fiscal 2001 was $4.2 million, as compared to $7.3 million in the same
quarter last year. This decrease primarily reflects the Company's lower cash
balances, which results from the continuation of our stock repurchase program.
In addition, during the first quarter of 2001, we determined that certain of
the assets valued at $6.8 million and held in our venture fund were impaired and
that the impairment was other than temporary. Accordingly, we recorded a charge
of approximately $3.4 million to write down the carrying value of the
investments to the best estimate of net realizable value. This impairment charge
is included in the accompanying condensed consolidated statement of operations
in other income, net. The impairment charge relates to certain investments in
non-public companies and represents management's estimate of the impairment
incurred during the period as a result of specific analysis of each investment,
considering the activities of and events occurring at each of the underlying
portfolio companies during the quarter. Our portfolio companies operate in
industries that are rapidly evolving and extremely competitive. For equity
investments in non-public companies for which there is not a market in which
their value is readily determinable, we review each investment for indicators of
impairment on a regular basis based primarily on achievement of business plan
objectives and current market conditions, among other factors. The primary
business plan objectives we consider include, among others, those related to
financial performance, such as achievement of planned financial results or
completion of capital raising activities, and those that are not primarily
financial in nature, such as the launching of technology or the hiring of key
employees. If it is determined that an impairment has occurred with respect to
an investment in a portfolio company, in the absence of quantitative valuation
metrics, management estimates the impairment and/or the net realizable value of
the portfolio investment based on public- and private-company market comparable
information and valuations completed for companies similar to our portfolio
companies.
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates to its investment portfolio. The Company places its
investments in a mix of short-term tax exempt and taxable instruments that meet
high credit quality standards, as specified in the Company's investment policy.
The policy also limits the amount of credit exposure to any one issue, issuer
and type of instrument. The Company does not anticipate any material loss with
respect to its investment portfolio.
17
The following table presents the carrying value and related weighted-average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at January 31, 2001. In accordance with the Company's
investment policy, the weighted-average duration of the Company's invested funds
portfolio does not exceed one year.
Principal (Notional) Amounts in U.S. Dollars:
CARRYING AVERAGE
(in thousands, except interest rates) AMOUNT INTEREST RATE
Short-term investments - fixed rate 129,354 4.15%
Money market funds - variable rate 104,869 3.64%
--------
Total interest bearing instruments $234,223 3.92%
========
Foreign Currency Risk. At the present time, the Company does not generally
hedge anticipated foreign currency cash flows but hedges only those currency
exposures associated with certain assets and liabilities denominated in
nonfunctional currencies. Hedging activities undertaken by the Company are
intended to offset the impact of currency fluctuations on these balances. The
success of this activity depends upon the accuracy of our estimates of balances
denominated in various currencies, primarily the Euro, Japanese yen, Taiwan
dollar, and British pound sterling. The Company had contracts for the sale and
purchase of foreign currencies with a notional value expressed in U.S. dollars
of $65.6 million. Looking forward, the Company does not anticipate any material
adverse effect on its consolidated financial position, results of operations, or
cash flows resulting from the use of these instruments. There can be no
assurance that these hedging transactions will be effective in the future.
The following table provides information about the Company's foreign exchange
forward contracts at January 31, 2001. Due to the short-term nature of these
contracts, the contract rate approximates the weighted-average contractual
foreign currency exchange rate and the amount in U.S. dollars approximates the
fair value of the contract at January 31, 2001. These forward contracts mature
in approximately thirty days.
Short-Term Forward Contracts to Sell and Buy Foreign Currencies in U.S.
Dollars:
CONTRACT
(in thousands, except for average contract rates) AMOUNT RATE
------------------------
Forward Contract (Notional Value)
Euro $ 40,012 1.077
Japanese yen 18,236 115.17
Taiwan dollar 4,602 32.35
British pound sterling 2,763 0.6837
The unrealized gains/losses on the outstanding forward contracts at January
31, 2001 were immaterial to the Company's consolidated financial statements. The
realized gains/losses on these contracts as they matured were not material to
the Company's consolidated financial position, results of operations, or cash
flows for the periods presented.
On November 1, 2000, Synopsys adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS 137 and SFAS 138. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized as either
assets or liabilities at fair value. Derivatives that are not designated as
hedging instruments are be adjusted to fair value through earnings. If the
derivative is designated as a hedging instrument, depending on the nature of the
exposure being hedged, changes in fair value will either be offset against the
change in fair value of the hedged asset, liability, or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of the hedge is recognized in
earnings immediately. Upon adoption on November 1, 2000, the cumulative
transition adjustment was insignificant. The Company does not believe that
ongoing application of SFAS 133 will significantly alter the
18
Company's hedging strategies. However, its application may increase the
volatility of other income and expense and other comprehensive income.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $328.9 million, a
decrease of $106.7 million, or 24%, from October 31, 2000. The decrease is
primarily a result of cash outflows for investing and financing activities,
including the repurchase of treasury stock of $144.5 million, capital
expenditures of $18.3 million, purchases of long-term investments of $6.0
million and cash paid on debt obligations of $3.1 million. These cash outflows
were partially offset by cash generated by operations of $14.8 million and
through investing and financing activities, including the exercise of stock
options and purchases of stock through the employee stock purchase plan of $28.2
million and the proceeds on sale of long-term investments of $22.8 million.
Accounts receivable decreased 1%, from $146.4 million at October 31, 2000 to
$145.2 million at January 31, 2001. Days sales outstanding in receivables
decreased to 91 days as of January 31, 2001 from 99 days at October 31, 2000 as
a result of our revenue growth from the prior quarter.
The Company's management believes that its current cash, cash equivalents,
short-term investments, lines of credit, and cash generated from operations will
satisfy its expected working capital and capital expenditure requirements for at
least the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our Revenue and Earnings May Fluctuate. Many factors affect our revenue and
earnings, which makes it difficult to achieve predictable revenue and earnings
growth. Among these factors are customer product and service demand, product
license terms, and the timing of revenue recognition on products and services
sold. The following specific factors could affect our revenue and earnings in a
particular quarter or over several quarterly or annual periods:
- Like all companies, our business is linked to the health of the U.S. and
international economies. Economic growth has slowed significantly in
recent months, and many commentators believe the U.S. economy will
experience a recession. Weakness in the U.S. and world economy could have
an adverse effect on our orders and revenue.
- Our orders have been, and are expected to continue to be, seasonal.
Historically, our first fiscal quarter has been our weakest.
- Our products are complex, and before buying them customers spend a great
deal of time reviewing and testing them. Our customers' evaluation and
purchase cycles do not necessarily match our quarterly periods. In the
past, we have received a disproportionate volume of orders in the last
week of a quarter. In addition, a large proportion of our business is
attributable to our largest customers. As a result, if any order, and
especially a large order, is delayed beyond the end of a fiscal period,
our orders for that period could be below our plan and our revenue could
be below any targets we may have published.
- Accounting rules determine when revenue is recognized on our product,
subscription and service contracts, and therefore impact how much revenue
we will report in any given fiscal period. The authoritative literature
under which the Company recognizes revenue has been, and is expected to
continue to be, the subject of much interpretative guidance. In general,
after the adoption of TSLs in the fourth quarter of fiscal 2000 (as
described above under "Results of Operations-Revenue"), most orders for
our products and services yield revenue over multiple quarters (extending
beyond the current fiscal year) or upon completion of performance rather
than at the time the contract is executed. The specific terms agreed to
with a customer may have the effect of requiring deferral or acceleration
of revenue in whole or in part. Therefore, for any given fiscal period it
is possible for us to fall short in our revenue and/or earnings plan even
while orders and backlog remain on plan or, conversely, to meet or exceed
our revenue and/or earnings plan because of backlog and deferred revenue,
while orders are under plan.
- In fiscal 2000, we modified the license and pricing structure for our
software products. We believe that the changes we made in August 2000 (the
adoption of TSLs) are producing benefits for both Synopsys and our
19
customers, but it remains possible that customer reaction will be
unfavorable or that the transition to the new structure will be disruptive
to business. Meeting our revenue plan for any given quarter depends, in
part, upon achieving a license mix of perpetual and subscription licenses
that includes 20% to 30% perpetual licenses. If we are unable to achieve a
mix in this range our ability to achieve short-term or long-term revenue
growth targets would be impaired.
Our Business Depends on the Semiconductor and Electronics Businesses.
Purchases of our products are largely dependent upon the commencement of new
design projects by semiconductor manufacturers and their customers, the number
of design engineers and the increasing complexity of designs. Though we do not
directly benefit from increases in the sheer number of chips produced, our
business has benefited from the rapid worldwide growth of the semiconductor
industry. The semiconductor industry has recently suffered a sharp decline in
orders and revenue. Many semiconductor manufacturers and vendors of products
incorporating semiconductors have recently announced earnings shortfalls and
employee layoffs. The outlook for the electronics industry is uncertain and it
is impossible to predict how long the current slump will last. In general,
budget cuts and layoffs have not to date directly impacted our customers' orders
in any material way, though our start up customers have shifted their
orientation towards shorter term licenses, and, overall, customer spending is
getting tighter and spending decisions more carefully scrutinized. It is
impossible to predict the conditions under which our business could be
materially adversely affected by the semiconductor slump. Demand for our
products and services may also be affected by mergers in the semiconductor and
systems industries, which may reduce the aggregate level of purchases of our
products and services by the combined companies. Slower growth in the
semiconductor and electronics industries, a reduced number of design starts,
tightening of customers' operating budgets, continued consolidation among our
customers or a shift toward field-programmable gate arrays (FPGAs) or other
types of semiconductors that can be designed with less-expensive EDA software,
all could have a material adverse effect on our business, financial condition
and results of operations.
Our Industry is Highly Competitive. The EDA industry is highly competitive.
We compete against other EDA vendors, and with customers' internally developed
design tools and internal design capabilities, for a share of the overall EDA
budgets of our potential customers. In general, competition is based on product
quality and features, post-sale support, price and, as discussed below, the
ability to offer a complete design flow. Our competitors include companies that
offer a broad range of products and services, such as Cadence, Mentor and
Avant!, as well as companies, including numerous start-up companies, that offer
products focused on a discrete phase of the integrated circuit design process.
In certain situations, Synopsys' competitors have been offering aggressive
discounts on certain of their products, in particular simulation and synthesis
products. As a result, average prices for these products may fall. In order to
compete successfully, we must continue to enhance our products and bring to
market new products that address the needs of our customers. We also will have
to expand our consulting services business. The failure to enhance existing
products, develop and/or acquire new products or expand our ability to offer
consulting services could have a material adverse effect on our business,
financial condition and results of operations.
Technology advances and customer requirements continue to fuel a change in
the nature of competition among EDA vendors. Increasingly, EDA companies compete
on the basis of "design flows" involving integrated logic and physical design
products (referred to as "physical synthesis" products) rather than on the basis
of individual "point" tools performing a discrete phase of the design process.
The need to offer physical synthesis products will become increasingly important
as ICs grow more complex. Our principal physical synthesis product was fully
released in June 2000, and has been well received by customers; we still do not
offer customers a complete design flow, however. We are working on completing
our design flow, although there is no guarantee that we will be able to offer a
competitive complete flow to customers. The market for physical design tools is
dominated by Cadence and Avant!, both of which offer products linking logic and
physical design. If we are unsuccessful in developing a complete design flow on
a timely basis or in convincing customers to adopt our integrated logical and
physical design products and methodology, our competitive position could be
significantly weakened.
Our Revenue Growth Depends on New and Non-Synthesis Products. Historically,
much of our growth has been attributable to the strength of our logic synthesis
products. These products accounted for 38% of revenue in the first fiscal
quarter of 2000 (see note 6 to the Notes to Unaudited Condensed Consolidated
Financial Statements). We believe that orders and revenues for our flagship
logic synthesis product, Design Compiler, peaked in fiscal 2000. Therefore, in
order to meet our revenue plan, revenue from our physical synthesis products,
our non-synthesis products and professional services must grow faster than our
overall revenue growth target. Among the products that we expect to be the most
important contributors to revenue growth are our Physical Compiler physical
synthesis,
20
VCS Verilog simulation and DesignWare IP library products. If revenue growth for
these products fails to meet our goals, it is unlikely that we will meet our
overall revenue growth target.
In order to sustain revenue growth over the long term, we will have to
introduce new products that are accepted by a broad range of customers and to
significantly expand our consulting services business. Product success is
difficult to predict. The introduction of new products and growth of a market
for such products cannot be assured. In the past we, like all companies, have
introduced new products that have failed to meet our revenue expectations.
Expanding revenue from consulting services will require us to recruit, hire and
train a large number of skilled employees, and to implement management controls
on bidding and executing on consulting engagements. The consulting business is
significantly different from the software business, however, and increasing
consulting orders and revenue while maintaining an adequate level of profit can
be difficult. There can be no assurance that we will be successful in expanding
revenue from existing or new products at the desired rate or in expanding our
services business, and the failure to do so would have a material adverse effect
on our business, financial condition and results of operations.
Businesses We Acquire May Not Perform as Projected. We have acquired or
merged with a number of companies in recent years, and as part of our efforts to
increase revenue and expand our product and services offerings we may acquire
additional companies. In addition to direct costs, acquisitions pose a number of
risks, including potential dilution of earnings per share, problems in
integrating the acquired products and employees into our business, the failure
to realize expected synergies or cost savings, the failure of acquired products
to achieve projected sales, the drain on management time for acquisition-related
activities, adverse effects on customer buying patterns and assumption of
unknown liabilities. While we attempt to review proposed acquisitions carefully
and negotiate terms that are favorable to us, there is no assurance that any
acquisition will have a positive effect on our performance.
Stagnation of International Economies Would Adversely Affect Our Performance.
During fiscal 2000, 42% of our revenue was derived from outside of North
America, an increase from 34% in fiscal 1999. International sales are vulnerable
to regional or worldwide economic or political conditions and to changes in
foreign currency exchange rates. A number of our largest European customers are
in the telecommunications equipment business, which has weakened considerably
over the past several months. The longer this weakness persists the more likely
our business with these customers will be negatively affected. The Japanese
economy has been stagnant for several years. If the Japanese economy remains
weak, revenue and orders from Japan, and perhaps the rest of Asia, could be
adversely affected. In addition, the yen-dollar and euro-dollar exchange rates
remain subject to unpredictable fluctuations. In recent weeks the yen has lost
value versus the dollar. Weakness of the yen could adversely affect revenue and
orders from Japan during future quarters. Asian countries other than Japan also
have experienced economic and currency problems in recent years, and in most
cases they have not fully recovered. If such conditions persist or worsen,
orders and revenues from the Asia Pacific region would be adversely affected.
Our Success Depends on Recruiting and Retaining Key Personnel. Our success is
dependent on technical and other contributions of key employees. We participate
in a dynamic industry, with significant start-up activity, and our headquarters
is in Silicon Valley, where skilled technical, sales and management employees
are in high demand. There are a limited number of qualified EDA engineers, and
the competition for such individuals is intense. Experience at Synopsys is
highly valued in the EDA industry and elsewhere, and our employees are recruited
aggressively by our competitors and by start-up companies. We have experienced,
and may continue to experience, significant employee turnover. There can be no
assurance that we can continue to recruit and retain the technical and
managerial personnel we need to run our business. Failure to do so could have a
material adverse effect on our business, financial condition and results of
operations.
Dependence on Proprietary Technology. Our success is dependent, in part, upon
our proprietary technology and other intellectual property rights. We rely on
contractual arrangements with customers, employees and others, and intellectual
property laws, to protect our proprietary technology. There can be no assurance
that these agreements will not be breached, that we would have adequate remedies
for any breach or that our trade secrets will not otherwise become known or be
independently developed by competitors. Moreover, effective intellectual
property protection may be unavailable or limited in certain foreign countries.
Failure to obtain or maintain appropriate patent, copyright or trade secret
protection, for any reason, could have a material adverse effect on our
business, financial condition and results of operations. In addition, there can
be no assurance that infringement claims will not be asserted against us; and
any such claims could require us to enter into royalty arrangements or result in
costly and time-consuming litigation.
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Fixed Operating Expenses. Our operating expenses are based in part on our
expectations of future revenue, and expense levels are generally committed in
advance of revenue. Since only a small portion of our expenses varies with
revenue, a shortfall in revenue translates directly into a reduction in net
income. For fiscal 2001 our target for overall expense growth over fiscal 2000
is 2.5% to 3.5%, substantially below the rate of growth in recent years, and we
have implemented expense controls to achieve this target. If we are unsuccessful
in generating anticipated revenue, or unsuccessful at controlling the growth of
expenses, however, our business, financial condition and results of operations
could be materially adversely affected.
Anti-Takeover Provisions. We have adopted a number of provisions that could
have anti-takeover effects. The Board of Directors has adopted a Preferred
Shares Rights Plan, commonly referred to as a "poison pill." In addition, the
Board of Directors has the authority, without further action by its
stockholders, to issue additional shares of Common Stock and to fix the rights
and preferences of, and to issue authorized but undesignated shares of Preferred
Stock. These and other provisions of Synopsys' Restated Certificate of
Incorporation and Bylaws and the Delaware General Corporation Law may have the
effect of deterring hostile takeovers or delaying or preventing changes in
control or management of Synopsys, including transactions in which the
shareholders of the Company might otherwise receive a premium for their shares
over then current market prices.
Change in Financial Accounting Standards. We prepare our financial statements
in conformity with generally accepted accounting principles (GAAP). GAAP are
subject to interpretation by the Financial Accounting Standards Board, the
American Institute of Certified Public Accountants (AICPA), the SEC and various
bodies appointed by these organizations to interpret existing rules and create
new accounting policies. In particular, a task force of the Accounting Standards
Executive Committee, a subgroup of the AICPA, meets on a quarterly basis to
review various issues arising under the existing software revenue recognition
rules, and issues interpretations of these rules. Additional interpretations
issued by the task force may have an adverse effect on how we report revenue or
on the way we conduct our business in the future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Interest Rate Risk" and "Foreign Currency
Risk" in Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations. Such information is incorporated herein by reference.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
None.
(b.) Reports on Form 8-K
The Company filed a report on Form 8-K on December 8, 2000 announcing
its financial results for the fourth fiscal quarter and year ended
October 31, 2000
The Company filed a report on Form 8-K on December 22, 2000 announcing
the adoption of a Stock Repurchase Plan for the purchase of shares of
its Common Stock
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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.
SYNOPSYS, INC.
By: /s/ ROBERT B. HENSKE
---------------------------------------
Robert B. Henske
Senior Vice President, Finance and
Operations, and Chief Financial Officer
(Principal Financial Officer)
Date: December 20, 2001
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