The EDA & Electronics IP Almanac: Q3 2010

However, revenue for fiscal year 2010 was just $1.380661 billion, an increase of only $20.616 million or 1.5% from $1.360045 billion in fiscal 2009.

“Synopsys had a strong fiscal year, relative to the industry and our expectations, and we enter fiscal 2011 with an even better outlook,” asserted Aart de Geus, chairman and CEO of Synopsys. “Building on significant technology and customer momentum, and an improved customer landscape, we expect to deliver growth in both traditional EDA and the adjacencies in which we've been steadily investing over the past several years.”

Synopsys' revenue guidance for nominal Q3 2010 provided 3 months earlier predicted Q3 revenue of $349 million to $357 million. However, that guidance was conditioned on including “no future acquisition-related expenses that may be incurred. The guidance targets constituted forward-looking information and were based on then-current expectations.”

On a generally accepted accounting principles (GAAP) basis, net income for nominal Q3 2010 dipped to $25.4 million, or $0.17 per share, but it was enough to exceed the $19.5 million, or $0.13 per share, for nominal Q3 2009. Sequentially, however, nominal Q3 2010 earnings of $25.4 million were well below nominal Q2 2010's earnings of $39.33 million and were also below nominal Q1's earnings of $39.55 million.

Synopsys' EPS guidance for nominal Q3 2010 provided 3 months earlier had predicted that nominal Q3 would yield $0.21 - $0.27 net income per share (subject to the same 'condition' as stated above). So the actual $0.17 EPS delivered for nominal Q3 2010 was some four cents below the bottom of the range guidance.

GAAP net income for fiscal year 2010 was significantly improved at $237.1 million, or $1.56 per share, compared to $167.7 million, or $1.15 per share for fiscal 2009. Lest we forget, however, net income for fiscal year 2010 includes a one-time $94.3 million, or $0.62 per share, tax benefit associated with the IRS settlement for fiscal years 2002-2004, announced on January 12, 2010. Without this one-time tax benefit, Synopsys' net income for fiscal 2010 may well have been $142.8 million, or only 85.2% of the fiscal 2009 net income.

SNPS (Synopsys stock) suffered a price decrease of 2.5% on December 2, 2010, the day after the nominal Q3 2010 results were announced. But the stock quickly recovered within 6 days and went on to achieve a closing price of $27.23 by December 23, 2010, the highest level the stock has been since closing at $26.35 way back on May 27, 2008. (However, the stock today is nowhere close to its most recent high of $35.29 reached on January 2, 2004, nor its all time high of $36.19 achieved on November 1, 1999.

Chart courtesy of Yahoo Finance

Certainly the cost to Synopsys of acquisitions during fiscal 2010 could easily lower fiscal 2010 earnings vs. those of fiscal 2009, but the revenue added by those acquisitions would surely have delivered an incremental benefit to the Synopsys revenue line for fiscal 2010.

Consider just the effect of one acquisition on revenue, for example. Virage Logic recognized revenue of $25.24 million in Q1 2010, the last quarter for which it published its stand-alone revenue prior to its acquisition by Synopsys consummated on September 2, 2010. Even assuming no improvement in revenue enjoyed by the integrated Virage Logic team, without the added Virage Logic revenue for the September and October 2010, Synopsys' total revenue for the fiscal year 2010 may have shown no growth or even a revenue decrease compared to fiscal 2009.

Synopsys did a decent job in cash flow management in fiscal 2010. Despite using some $500,829,000 net cash in connection with acquisitions during the year, Synopsys still managed to improve its fiscal year end cash hoard to $775,497,000 or $73,794,000 more cash that it had when it began the year.

Speaking of Cash Flow...

This is likely as good a place as any, to return to the earlier discussion about whether 'net income' is the best measure of a company's performance, first mentioned above in the text between Tables 1 and 2, and mentioned again in the section on Cadence (see The Murky World... above). As press time approached for the JANUARY 10th posting of the EDA WEEKLY, the writer came across an article by Seth Jayson in the Motley Fool published on December 23, 2010. Here's how his article began:

“Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measurement of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls. Earnings' unreliability is one of the reasons investors often flip straight past the income statement to check the cash-flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company or merely disguised a cash gusher with a pretty headline.”

Moreover, the examples of using 'free cash flow' instead of net income that Mr. Jayson chose? Four of our G5 EDA vendors! This chart from his article is relevant:

“Over the past 12 months, Synopsys generated $301.8 million cash on net income of $237.1 million. That means it turned 21.9% of its revenue into FCF. That sounds pretty impressive. Still, it always pays to compare that figure with those of sector and industry peers and competitors, to see how your company stacks up.

But just when one is getting enthusiastic about 'free cash flow' as a measure, the author warns:

“Unfortunately, the cash-flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash comes from high-quality sources. They need to be real and replicable in the upcoming quarters, rather than offset by continual cash outflows that don't appear on the income statement, such as major capital expenditures. For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses, like depreciation, is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; it's good to see, but it's ordinary in recessionary times, and you can increase collections only so much”.

Gee, it appears that the question is still open. Nevertheless, the relative ranking of the four vendors above is similar, whether “net income' or 'free cash flow' is the criterion.

The Vendor Supplemental Reports on Revenue Distribution

In the EDA WEEKLY of September 13, 2010, entitled “Whither EDA?,” the writer discussed in Footnote [6] the appearance of supplementary reports from several G5 vendors on revenue distribution:

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