For the third quarter, Synopsys reported revenue of $277.2 million, a 10 percent increase compared to $251.5 million for the third quarter of fiscal 2005.
"Our third quarter was excellent, as we again executed well on all fronts," said Aart de Geus, chairman and CEO of Synopsys. "Our momentum is visible through strong financial results, customer adoptions of our technology and the introduction of innovative new products."
On a generally accepted accounting principles (GAAP) basis, net income for the third quarter of fiscal 2006 was $7.6 million, or $0.05 per share, compared to net income of $17.3 million, or $0.12 per share, for the third quarter of fiscal 2005, which included a one-time gain associated with a litigation settlement received in connection with the acquisition of Nassda Corporation. GAAP net income for the current period includes employee stock- based compensation expense of $15.6 million due to the adoption of Statement of Financial Accounting Standards 123(R) (FAS 123(R)) in fiscal 2006. Net income prior to fiscal 2006 did not include employee stock-based compensation expense related to FAS 123(R).
On a non-GAAP basis, net income for the third quarter of fiscal 2006 was $30.1 million, or $0.21 per share, compared to non-GAAP net income of $15.3 million, or $0.11 per share, for the third quarter of fiscal 2005.
Non-GAAP net income consists of GAAP net income excluding employee stock- based compensation expense calculated in accordance with FAS 123(R) and, to the extent incurred in a particular quarter or period, amortization of intangible assets, in-process research and development charges, integration and other acquisition-related expenses, facilities and workforce realignment charges, and other significant items which, in the opinion of management, are infrequent or non-recurring. See "GAAP Reconciliation" below.
Synopsys also announced its operating model targets for the fourth quarter and full fiscal year 2006. These targets constitute forward-looking information and are based on current expectations. For a discussion of factors that could cause actual results to differ materially from these targets, see "Forward-Looking Statements" below.
Fourth Quarter of Fiscal 2006 Targets: -- Revenue: $274 million - $282 million -- GAAP expenses: $265 million - $281 million -- Non-GAAP expenses: $239 million - $249 million -- Other income and expense: $0 million - $4 million -- Fully diluted outstanding shares: 140 million - 144 million -- Tax rate applied in non-GAAP net income calculations: 30 percent -- GAAP earnings per share: $ 0.01 - $0.05 -- Non-GAAP earnings per share: $0.17 - $0.19 -- Revenue from backlog: more than 90 percent Full-Year Fiscal Year 2006 Targets -- Revenue: $1,086 million - $1,094 million -- Fully diluted outstanding shares: 142 million - 147 million -- Tax rate applied in non-GAAP net income calculations: 31 percent -- GAAP earnings per share: $0.11 - $0.15 -- Non-GAAP earnings per share: $0.73 - $0.75 -- GAAP cash flow from operations: greater than $175 million GAAP Reconciliation
Synopsys' management evaluates and makes decisions about the Company's business operations primarily based on the bookings, revenue and direct, ongoing and recurring costs of those operations. Management does not believe amortization of intangible assets, in-process research and development charges, integration and other acquisition-related expenses, facilities and workforce realignment charges and other significant infrequent items are ongoing and recurring operating costs of its core software, intellectual property and service business operations. In addition, while employee stock- based compensation expense calculated in accordance with FAS 123(R) and change in the fair value of the Company's non-qualified deferred plan compensation plan obligations constitute ongoing and recurring expenses of the Company, such expenses are excluded from non-GAAP results because they are not expenses that require cash settlement by the Company and because such expenses are not used by management to assess the core profitability of the Company's business operations. Therefore, management excludes such costs, to the extent incurred in a particular quarter, from the following GAAP financial measures included in this earnings release: total cost of revenue, gross margin, total operating expenses, operating income (loss), income (loss) before provision (benefit) for income taxes, provision (benefit) for income taxes, net income (loss) and net income (loss) per share.
For each such measure, excluding these costs provides management with more consistent, comparable information about the Company's core profitability. For example, since the Company does not acquire businesses on a predictable cycle, management would have difficulty evaluating the Company's profitability as measured by gross margin, operating margin, income before taxes and net income on a period-to-period basis unless it excluded acquisition-related charges. Similarly, the Company does not undertake significant restructuring or realignments on a regular basis, and, as a result, excludes associated charges in order to enable better and more consistent evaluations of the Company's operating expenses before and after such actions are taken. Management also uses these measures to help it make budgeting decisions, for example, as between product development expenses (which affect cost of revenue and gross margin) and research and development, sales and marketing and general and administrative expenses (which affect operating expenses and operating margin). Finally, the availability of such information helps management track performance to both internal and externally communicated financial targets and to its competitors' operating results.
Management recognizes that the use of these non-GAAP measures has certain limitations, including the fact that management must exercise judgment in determining whether certain types of charges, such as those relating to workforce reductions executed in the ordinary course, should be excluded from non-GAAP results. However, management believes that, although it is important for investors to understand GAAP measures, providing investors with these non-GAAP measures gives them additional important information to enable them to assess, in a way management assesses, Synopsys' current and future continuing operations.
Reconciliation of Third Quarter Results
The following tables reconcile the specific items excluded from GAAP in the calculation of non-GAAP net income and earnings per share for the third quarter fiscal 2006.
GAAP to Non-GAAP Reconciliation of Third Quarter Results (in thousands, except per share amounts) Income Statement Reconciliation Three Months Ended Nine Months Ended (in thousands) July 31, July 31, 2006 2005 2006 2005 GAAP net income (loss) (2) $7,550 $17,294 $14,622 $(2,003) Adjustments: Amortization of intangible assets 13,354 24,018 42,980 96,759 Stock-based compensation (1) 15,601 652 47,932 1,790 In-process research and development -- -- 800 5,700 Litigation settlement -- (33,000) -- (33,000) Tax effect (6,359) 6,381 (25,222) (26,490) Non-GAAP net income (2) $30,146 $15,345 $81,112 $42,756 (1) Stock-based compensation results from the Company's implementation of FAS 123(R) during fiscal 2006. (2) Expenses related to the change in the fair value of the non-qualified deferred compensation plan obligation had no effect on net income. Earnings Per Share Reconciliation Three Months Ended Nine Months Ended July 31, July 31, 2006 2005 2006 2005 GAAP earnings (loss) per share (2) $0.05 $0.12 $0.10 $(0.01) Adjustments: Amortization of intangible assets 0.09 0.17 0.29 0.66 Stock-based compensation (1) 0.11 0.01 0.33 0.01 In-process research and development -- -- 0.01 0.04 Litigation settlement -- (0.23) -- (0.23) Tax effect (0.04) 0.04 (0.17) (0.18) Non-GAAP earnings per share (2) $0.21 $0.11 $0.56 $0.29 Shares used in calculation 143,964 145,668 145,662 146,119 (1) Stock-based compensation results from the Company's implementation of FAS 123(R) during fiscal 2006. (2) Expenses related to the change in the fair value of the non-qualified deferred compensation plan obligation had no effect on earnings per share. Reconciliation of Estimated Target Operating Results