Document
false--10-31Q220192019-04-300000883241falseLarge Accelerated FilerSYNOPSYS INCfalseSNPS111P7Y0.010.01400000000400000000149265000149982000000011950002520000105000022860002264000115500012300017140000.010.01200000020000000018000001470000079960007278000


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(MARK ONE)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2019
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: 000-19807
 
 
 
synopsyslogoa07a01a18.jpg
SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
DELAWARE
 
56-1546236
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
690 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices, including zip code)
(650) 584-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
($0.01 par value)
SNPS
Nasdaq Global Select Market
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of May 22, 2019, there were 149,899,115 shares of the registrant’s common stock outstanding.





SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED APRIL 30, 2019
TABLE OF CONTENTS
 
 
 
 
 
Page
PART I.
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.





PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
 
Financial Statements
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
 
April 30, 2019
 
 October 31,
2018*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
631,161

 
$
723,115

Accounts receivable, net
526,691

 
554,217

Inventories
166,329

 
122,407

Income taxes receivable and prepaid taxes
59,853

 
76,525

Prepaid and other current assets
259,849

 
67,533

Total current assets
1,643,883

 
1,543,797

Property and equipment, net
344,176

 
309,310

Goodwill
3,143,795

 
3,143,249

Intangible assets, net
306,927

 
360,404

Long-term prepaid taxes
22,093

 
138,312

Deferred income taxes
352,667

 
404,166

Other long-term assets
380,682

 
246,736

Total assets
$
6,194,223

 
$
6,145,974

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
365,848

 
$
578,326

Accrued income taxes
6,983

 
27,458

Deferred revenue
1,194,404

 
1,152,862

Short-term debt
165,692

 
343,769

Total current liabilities
1,732,927

 
2,102,415

Long-term accrued income taxes
34,667

 
50,590

Long-term deferred revenue
60,825

 
116,859

Long-term debt
126,152

 
125,535

Other long-term liabilities
324,217

 
265,560

Total liabilities
2,278,788

 
2,660,959

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value: 2,000 shares authorized; none outstanding

 

Common stock, $0.01 par value: 400,000 shares authorized; 149,982 and 149,265 shares outstanding, respectively
1,500

 
1,493

Capital in excess of par value
1,659,484

 
1,644,830

Retained earnings
2,912,811

 
2,543,688

Treasury stock, at cost: 7,278 and 7,996 shares, respectively
(567,503
)
 
(597,682
)
Accumulated other comprehensive income (loss)
(96,720
)
 
(113,177
)
Total Synopsys stockholders’ equity
3,909,572

 
3,479,152

Non-controlling interest
5,863

 
5,863

Total stockholders’ equity
3,915,435

 
3,485,015

Total liabilities and stockholders’ equity
$
6,194,223

 
$
6,145,974

* Derived from audited financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.

1



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Time-based products
$
558,305

 
$
556,770

 
$
1,112,021

 
$
1,127,703

Upfront products
143,401

 
99,960

 
273,914

 
191,564

Maintenance and service
134,536

 
120,106

 
270,708

 
226,995

Total revenue
836,242

 
776,836

 
1,656,643

 
1,546,262

Cost of revenue:
 
 
 
 
 
 
 
Products
116,010

 
108,199

 
232,630

 
219,593

Maintenance and service
59,788

 
50,130

 
118,617

 
100,884

Amortization of intangible assets
14,881

 
20,450

 
32,324

 
39,458

Total cost of revenue
190,679

 
178,779

 
383,571

 
359,935

Gross margin
645,563

 
598,057

 
1,273,072

 
1,186,327

Operating expenses:
 
 
 
 
 
 
 
Research and development
290,299

 
252,134

 
561,625

 
516,545

Sales and marketing
158,652

 
147,188

 
314,611

 
297,700

General and administrative
56,351

 
58,809

 
98,412

 
115,181

Amortization of intangible assets
10,316

 
10,736

 
21,100

 
20,275

Restructuring
14,443

 
2,176

 
14,408

 
1,894

Total operating expenses
530,061

 
471,043

 
1,010,156

 
951,595

Operating income
115,502

 
127,014

 
262,916

 
234,732

Other income (expense), net
18,415

 
(7,715
)
 
18,056

 
4,670

Income before income taxes
133,917

 
119,299

 
280,972

 
239,402

Provision (benefit) for income taxes
15,707

 
16,827

 
9,248

 
140,621

Net income
$
118,210

 
$
102,472

 
$
271,724

 
$
98,781

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.79

 
$
0.69

 
$
1.82

 
$
0.66

Diluted
$
0.77

 
$
0.67

 
$
1.77

 
$
0.64

Shares used in computing per share amounts:
 
 
 
 
 
 
 
Basic
149,712

 
149,034

 
149,500

 
149,245

Diluted
153,904

 
153,167

 
153,383

 
153,664

See accompanying notes to unaudited condensed consolidated financial statements.


2



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
118,210

 
$
102,472

 
$
271,724

 
$
98,781

Other comprehensive income:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(3,327
)
 
(11,122
)
 
2,056

 
9,958

Cash flow hedges:
 
 
 
 
 
 
 
Deferred gains (losses), net of tax of $(123) and $(1,714), for the three and six months ended April 30, 2019, respectively, and of $2,264 and $(1,155) for each of the same periods in fiscal 2018, respectively.
447

 
(8,533
)
 
5,914

 
4,480

Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(1,050) and $(2,286), for the three and six months ended April 30, 2019 respectively, and of $1,195 and $2,520 for each of the same periods in fiscal 2018, respectively.
4,012

 
(5,542
)
 
8,487

 
(10,848
)
Other comprehensive income (loss), net of tax effects
1,132

 
(25,197
)
 
16,457

 
3,590

Comprehensive income
$
119,342

 
$
77,275

 
$
288,181

 
$
102,371

See accompanying notes to unaudited condensed consolidated financial statements.


3



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

 
 
 
Capital in
Excess of
Par
Value
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total 
Synopsys
Stockholders’
Equity
 
Non-controlling
Interest
 
Stockholders'
Equity
 
Common Stock
 
 
Shares
 
Amount
 
Balance at October 31, 2018
149,265

 
$
1,493

 
$
1,644,830

 
$
2,543,688

 
$
(597,682
)
 
$
(113,177
)
 
$
3,479,152

 
$
5,863

 
$
3,485,015

Net income
 
 
 
 
 
 
153,514

 
 
 
 
 
153,514

 
 
 
153,514

Retained earnings adjustment due to adoption of accounting standards related to revenue(1)
 
 
 
 
 
 
257,594

 
 
 
 
 
257,594

 
 
 
257,594

Retained earnings adjustment due to adoption of an accounting standard related to income taxes(2)
 
 
 
 
 
 
(130,544
)
 
 
 
 
 
(130,544
)
 
 
 
(130,544
)
Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
15,325

 
15,325

 
 
 
15,325

Purchases of treasury stock
(346
)
 
(3
)
 
3

 
 
 
(29,185
)
 
 
 
(29,185
)
 
 
 
(29,185
)
Common stock issued, net of shares withheld for employee taxes
357

 
3

 
(27,736
)
 
(3,342
)
 
26,755

 
 
 
(4,320
)
 
 
 
(4,320
)
Stock-based compensation
 
 
 
 
37,266

 
 
 
 
 
 
 
37,266

 
 
 
37,266

Balance at January 31, 2019
149,276

 
$
1,493

 
$
1,654,363

 
$
2,820,910

 
$
(600,112
)
 
$
(97,852
)
 
$
3,778,802

 
$
5,863

 
$
3,784,665

Net income
 
 
 
 
 
 
118,210

 
 
 
 
 
118,210

 
 
 
118,210

Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
1,132

 
1,132

 
 
 
1,132

Purchases of treasury stock
(780
)
 
(8
)
 
8

 
 
 
(80,000
)
 
 
 
(80,000
)
 
 
 
(80,000
)
Equity forward contract
 
 
 
 
(20,000
)
 
 
 
 
 
 
 
(20,000
)
 
 
 
(20,000
)
Common stock issued, net of shares withheld for employee taxes
1,486

 
15

 
(11,795
)
 
(26,309
)
 
112,609

 
 
 
74,520

 
 
 
74,520

Stock-based compensation
 
 
 
 
36,908

 
 
 
 
 
 
 
36,908

 
 
 
36,908

Balance at April 30, 2019
149,982

 
$
1,500

 
$
1,659,484

 
$
2,912,811

 
$
(567,503
)
 
$
(96,720
)
 
$
3,909,572

 
$
5,863

 
$
3,915,435

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at October 31, 2017
150,445

 
$
1,505

 
$
1,622,429

 
$
2,143,873

 
$
(426,208
)
 
$
(65,979
)
 
$
3,275,620

 
$
4,104

 
$
3,279,724

Net income (loss)
 
 
 
 
 
 
(3,691
)
 
 
 
 
 
(3,691
)
 
 
 
(3,691
)
Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
28,787

 
28,787

 
 
 
28,787

Purchases of treasury stock
(1,987
)
 
(20
)
 
20

 
 
 
(180,000
)
 
 
 
(180,000
)
 
 
 
(180,000
)
Equity forward contract
 
 
 
 
(20,000
)
 
 
 
 
 
 
 
(20,000
)
 
 
 
(20,000
)
Common stock issued, net of shares withheld for employee taxes
495

 
5

 
(22,103
)
 
(6,328
)
 
32,126

 
 
 
3,700

 
 
 
3,700

Stock-based compensation
 
 
 
 
32,113

 
 
 
 
 
 
 
32,113

 
 
 
32,113

Balance at January 31, 2018
148,953

 
$
1,490

 
$
1,612,459

 
$
2,133,854

 
$
(574,082
)
 
$
(37,192
)
 
$
3,136,529

 
$
4,104

 
$
3,140,633

Net income
 
 
 
 
 
 
102,472

 
 
 
 
 
102,472

 
 
 
102,472

Retained earnings adjustment due to adoption of an accounting standard related to reclassification of certain tax effects from accumulated other comprehensive income

 
 
 
 
 
 
(293
)
 
 
 
 
 
(293
)
 
 
 
(293
)
Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
(25,197
)
 
(25,197
)
 
 
 
(25,197
)
Purchases of treasury stock
(916
)
 
(9
)
 
9

 
 
 
(75,000
)
 
 
 
(75,000
)
 
 
 
(75,000
)
Equity forward contract
 
 
 
 
40,000

 
 
 
 
 
 
 
40,000

 
 
 
40,000

Common stock issued, net of shares withheld for employee taxes
924

 
9

 
(6,196
)
 
(12,746
)
 
64,066

 
 
 
45,133

 
 
 
45,133

Stock-based compensation
 
 
 
 
32,649

 
 
 
 
 
 
 
32,649

 
 
 
32,649

Balance at April 30, 2018
148,961

 
$
1,490

 
$
1,678,921

 
$
2,223,287

 
$
(585,016
)
 
$
(62,389
)
 
$
3,256,293

 
$
4,104

 
$
3,260,397


(1) See Note 2. Summary of Significant Accounting Policies for additional information on the retained earnings adjustment due to adoption of Accounting Standards Codification (ASC) 606 and ASC 340.
(2) See Note 14. Taxes for additional information on the retained earnings adjustment due to adoption of Accounting Standard Update (ASU) 2016-16.
See accompanying notes to unaudited condensed consolidated financial statements.

4




SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended 
 April 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
271,724

 
$
98,781

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and depreciation
102,841

 
96,829

Amortization of capitalized costs to obtain revenue contracts
28,425

 

Stock compensation
75,374

 
65,288

Allowance for doubtful accounts
3,950

 
3,367

(Gain) loss on sale of property and investments
(3,744
)
 
(93
)
Deferred income taxes
(23,486
)
 
38,878

Net changes in operating assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
23,478

 
(105,457
)
Inventories
(50,358
)
 
(40,997
)
Prepaid and other current assets
(18,547
)
 
(6,442
)
Other long-term assets
(91,271
)
 
(21,728
)
Accounts payable and accrued liabilities
(160,492
)
 
(131,763
)
Income taxes
(32,059
)
 
(44,577
)
Deferred revenue
82,966

 
52,229

Net cash provided by operating activities
208,801

 
4,315

Cash flows from investing activities:
 
 
 
Proceeds from sales and maturities of short-term investments

 
12,449

Proceeds from sales of long-term investments
4,176

 

Proceeds from sales of property and equipment

 
1,662

Purchases of property and equipment
(68,962
)
 
(48,612
)
Cash paid for acquisitions and intangible assets, net of cash acquired

 
(643,537
)
Capitalization of software development costs
(1,491
)
 
(1,760
)
Net cash used in investing activities
(66,277
)
 
(679,798
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
188,760

 
450,000

Repayment of debt
(366,562
)
 
(69,687
)
Issuances of common stock
83,352

 
58,975

Payments for taxes related to net share settlement of equity awards
(13,173
)
 
(11,883
)
Purchase of equity forward contract
(20,000
)
 

Purchases of treasury stock
(109,185
)
 
(235,000
)
Other
(762
)
 

Net cash (used in) provided by financing activities
(237,570
)
 
192,405

Effect of exchange rate changes on cash, cash equivalents and restricted cash
3,093

 
5,773

Net change in cash, cash equivalents and restricted cash
(91,953
)
 
(477,305
)
Cash, cash equivalents and restricted cash, beginning of period
725,001

 
1,050,075

Cash, cash equivalents and restricted cash, end of period
$
633,048

 
$
572,770

See accompanying notes to unaudited condensed consolidated financial statements.

5



SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Synopsys, Inc. (Synopsys or the Company) provides products and services used by designers across the entire silicon to software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure the security and quality of their code. The Company is a global leader in supplying the electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. The Company also offers semiconductor intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. The Company provides software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. To complement these offerings, the Company provides technical services and support to help its customers develop advanced chips and electronic systems. These products and services are part of the Company’s Semiconductor & System Design segment.
The Company is also a leading provider of software tools and services that improve the security and quality of software code in a wide variety of industries, including electronics, financial services, media, automotive, medicine, energy and industrials. These tools and services are part of the Company’s Software Integrity segment.

Note 2. Summary of Significant Accounting Policies
The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its unaudited condensed consolidated balance sheets, results of operations, comprehensive income, stockholders' equity and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in Synopsys’ Annual Report on Form 10-K for the fiscal year ended October 31, 2018 as filed with the SEC on December 17, 2018.
Use of Estimates. To prepare financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position.
Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany accounts and transactions have been eliminated.
Fiscal Year End. The Company’s fiscal year generally ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that every five or six years, the Company has a 53-week year. When a 53-week year occurs, the Company includes the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2019 is a 52-week year and will end on November 2, 2019. Fiscal 2018 was a 53-week year and ended on November 3, 2018.
The results of operations for the first six months of fiscal 2019 and 2018 included 26 weeks and 27 weeks, respectively, and ended on May 4, 2019 and May 5, 2018, respectively. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Segment Reporting. Effective in fiscal 2019, the Company realigned its business to evaluate the results of its Software Integrity business separately from Synopsys’ traditional electronic design automation (EDA) and semiconductor IP business. The Chief Operating Decision Makers (CODMs) now regularly review disaggregated information for the following two reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and associated services, and (2) Software Integrity, which includes security and quality solutions for software development across many industries. Synopsys' CODMs are its two co-Chief Executive Officers. Historical segment disclosures have been recast to retrospectively reflect the change from one to two reportable segments.

6



Goodwill. Effective in the first quarter of fiscal 2019, with the change in the Company’s reportable segments, the Company has determined there are now two reporting units, requiring goodwill to be allocated to the two reporting units using a relative fair value method. Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and identifiable intangible assets acquired by the Company. The carrying amount of goodwill at each reporting unit is tested for impairment annually as of October 31, or more frequently if facts and circumstances warrant a review. As a result of changes to the Company's segment reporting, the Company conducted a quantitative impairment test for each of its reporting units and concluded that there was no impairment. The Company performs either a qualitative or quantitative analysis when testing a reporting unit’s goodwill for impairment. A qualitative goodwill impairment test is performed when the fair value of a reporting unit historically has significantly exceeded the carrying value of its net assets and based on current operations is expected to continue to do so. Otherwise, the Company is required to conduct a quantitative impairment test for each reporting unit and estimates the fair value of each reporting unit using a combination of a discounted cash flow analysis and a market approach based on market multiples. The discount rate used in an income approach is based on the Company's weighted-average cost of capital and may be adjusted for the relevant risks pertaining to projecting future cash flows. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded for the difference. Refer to Note 3. Goodwill and Intangible Assets for a discussion of the change in reporting units as related to the realignment of the Company’s segments.
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC 606), "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in “Revenue Recognition (ASC 605).” The new guidance creates a single, principle-based model for revenue recognition that is intended to expand and improve companies' revenue disclosures. For revenue recognition policies under ASC 605, refer to Note 2 - Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended October 31, 2018.
ASC 606 requires a company to recognize revenue when goods are transferred or services are provided to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. ASC 606 also requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to ASC 606, including amendments that deferred the initially proposed adoption date and clarified accounting for licenses of intellectual property and identifying performance obligations.
The Company adopted ASC 606 at the beginning of fiscal 2019 using the modified retrospective transition method. Under this method, periods prior to the adoption date are not adjusted and continue to be reported under the revenue accounting literature in effect during those periods. The Company evaluated contracts that were in effect at the beginning of fiscal 2019 as if they had been accounted for under ASC 606 from the contract inception and summarized the most significant adoption impacts as follows:
Revenue for certain ongoing contracts that was previously deferred would have been recognized in the periods prior to adoption under ASC 606. Therefore, upon adoption, the Company recorded the following adjustments to the beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts: an increase to retained earnings of $265.1 million, a decrease to unbilled receivables of $27.4 million, an increase to contract assets of $126.9 million, and a decrease in deferred revenue of $165.6 million.
The Company capitalized $73.8 million of incremental costs for obtaining contracts with customers at the adoption date with a corresponding adjustment to retained earnings and is amortizing these costs over the contract term.
The Company recorded an increase in its opening deferred tax liability of $81.4 million, with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments.

7



The impacts of adopting ASC 606 on the Company's unaudited condensed consolidated financial statements for the six months are summarized in the tables below.
Balance Sheet Accounts
The following table summarizes the effects of adopting ASC 606 on certain account balances of the unaudited condensed consolidated balance sheet that were impacted as of April 30, 2019:
 
As reported under ASC 606
 
Adjustments
 
Adjusted balance under ASC 605
 
(in thousands)
Receivables, net
$
526,691

 
$
61,849

 
$
588,540

Prepaid and other current assets
259,849

 
(168,487
)
 
91,362

Deferred income taxes
352,667

 
67,763

 
420,430

Other long-term assets
380,682

 
(96,441
)
 
284,241

Accounts payable and other accrued liabilities
365,848

 
(9,499
)
 
356,349

Deferred revenue
1,194,404

 
91,067

 
1,285,471

Long-term deferred revenue
60,825

 
73,454

 
134,279

Other long-term liabilities (1)
324,217

 
(16,671
)
 
307,546

Retained earnings
2,912,811

 
(273,667
)
 
2,639,144

(1) Includes long-term deferred tax liabilities.
Statements of Operations
The following table summarizes the effects of adopting ASC 606 on the unaudited condensed consolidated statements of operations for the three and six months ended April 30, 2019:

8



 
Three Months Ended 
 April 30, 2019
 
Six Months Ended 
 April 30, 2019
 
As reported under ASC 606
 
Adjustments
 
Adjusted under ASC 605
 
As reported under ASC 606
 
Adjustments
 
Adjusted under ASC 605
 
(in thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
    Time-based products
$
558,305

 
$
86,762

 
$
645,067

 
$
1,112,021

 
$
102,618

 
$
1,214,639

    Upfront products
143,401

 
(61,057
)
 
82,344

 
273,914

 
(77,843
)
 
196,071

    Maintenance and service
134,536

 
(9,379
)
 
125,157

 
270,708

 
(30,793
)
 
239,915

Total revenue
836,242

 
16,326

 
852,568

 
1,656,643

 
(6,018
)
 
1,650,625

Cost of Revenue:
 
 
 
 


 
 
 
 
 


    Products
116,010

 

 
116,010

 
232,630

 

 
232,630

    Maintenance and service
59,788

 

 
59,788

 
118,617

 

 
118,617

Amortization of intangible assets
14,881

 

 
14,881

 
32,324

 

 
32,324

Total cost of revenue
190,679

 

 
190,679

 
383,571

 

 
383,571

Gross margin
645,563

 
16,326

 
661,889

 
1,273,072

 
(6,018
)
 
1,267,054

Operating expenses:
 
 
 
 


 
 
 
 
 


Research and development
290,299

 

 
290,299

 
561,625

 

 
561,625

    Sales and marketing
158,652

 
1,942

 
160,594

 
314,611

 
13,126

 
327,737

General and administrative
56,351

 

 
56,351

 
98,412

 

 
98,412

Amortization of intangible assets
10,316

 

 
10,316

 
21,100

 

 
21,100

Restructuring
14,443

 

 
14,443

 
14,408

 

 
14,408

Total operating expenses
530,061

 
1,942

 
532,003

 
1,010,156

 
13,126

 
1,023,282

Operating income
115,502

 
14,384

 
129,886

 
262,916

 
(19,144
)
 
243,772

Other income (expense), net
18,415

 

 
18,415

 
18,056

 

 
18,056

Income before provision for income taxes
133,917

 
14,384

 
148,301

 
280,972

 
(19,144
)
 
261,828

Provision (benefit) for income taxes
15,707

 
2,599

 
18,306

 
9,248

 
(3,071
)
 
6,177

Net income
$
118,210

 
$
11,785

 
$
129,995

 
$
271,724

 
$
(16,073
)
 
$
255,651

Net income per share:
 
 
 
 


 
 
 
 
 
 
    Basic
$
0.79

 
$
0.08

 
$
0.87

 
$
1.82

 
$
(0.11
)
 
$
1.71

    Diluted
$
0.77

 
$
0.07

 
$
0.84

 
$
1.77

 
$
(0.10
)
 
$
1.67

Shares used in computing per share amounts:
 
 
 
 


 
 
 
 
 
 
    Basic
149,712

 
 
 
149,712

 
149,500

 
 
 
149,500

    Diluted
153,904

 
 
 
153,904

 
153,383

 
 
 
153,383


Statements of Cash Flows

Adoption of ASC 606 had no impact to cash from or used in operating, financing, or investing activities on the unaudited condensed consolidated cash flows statements.
Revenue Policy
The core principle of ASC 606 is to recognize revenue for the transfer of services or products to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services or products. The principle is achieved through the following five-step approach:
Identification of the contract, or contracts, with the customer
Identification of the performance obligation in the contract
Determination of the transaction price 
Allocation of the transaction price to the performance obligations in the contract 
Recognition of revenue when, or as, the Company satisfies a performance obligation 

9



Nature of Products and Services
The Company generates revenue from the sale of products that include software licenses and, to a lesser extent, hardware products, maintenance and services. The various types are set forth below.
Electronic Design Automation
Software license revenue consists of fees associated with the licensing of the Company's software primarily through Technology Subscription License (TSL) contracts. TSLs are time-based licenses for a finite term and generally provide the customer with limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. The majority of the Company's arrangements are TSLs due to the nature of its business and customer requirements. In addition to the licenses, the arrangements also include: post-contract customer support, which includes providing frequent updates and upgrades to maintain the utility of the software due to rapid changes in technology; other intertwined services such as multiple copies of the tools; assisting the Company's customers in applying the Company's technology in the customers' development environment; and rights to remix licenses for other licenses. Payments are generally received in equal or near equal installments over the term of the arrangement. Under ASC 605, these arrangements were qualified to be recognized ratably over the contract terms. Under ASC 606, the Company has concluded that its software licenses in TSL contracts are not distinct from its obligation to provide unspecified software updates to the licensed software throughout the license term. Such updates represent inputs to a single, combined performance obligation, commencing upon the later of the arrangement effective date or transfer of the software license. Remix rights are not an additional promised good or service in the contract, and where unspecified additional software product rights are part of the contract with the customer, such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support because such rights are provided for the same period of time and have the same pattern of transfer to the customer over the duration of the subscription term. 
IP & System Integration
The Company generally licenses IP under nonexclusive license agreements that provide usage rights for specific applications. Additionally, for certain IP license agreements, royalties are collected as customers sell their own products that incorporate the Company’s IP. Under ASC 605, the Company recognized revenue either upfront if certain criteria in ASC 605 were met, or over the contractual period for IP licensing and support arrangements if such arrangements were combined with other TSL arrangements. Under ASC 606, these arrangements generally have two distinct performance obligations that consist of transferring the licensed IP and the support service. Support services consist of a stand-ready obligation to provide technical support and software updates over the support term. Revenue allocated to the IP license is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support services is recognized ratably over the support term. Royalties are recognized as revenue is earned, generally when the customer sells its products that incorporate the Company’s IP. 
Software Integrity Products
Software Integrity product arrangements provide customers the right to software licenses, software updates and technical support. Under the term of these arrangements, the customer expects to receive integral updates to the software licenses that protect the customer’s software from potential security vulnerabilities. The licenses and software updates together serve to fulfill the Company’s commitment to the customer, as they represent inputs to a single, combined performance obligation that commences upon the later of the arrangement effective date or transfer of the software license. Software updates are part of the contract with the customer, and such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support because such rights are provided for the same period of time and have the same time-based pattern of transfer to the customer.
Hardware
The Company generally has two performance obligations in arrangements involving the sale of hardware products. The first performance obligation is to transfer the hardware product, which includes embedded software integral to the functionality of the hardware product. The second performance obligation is to provide maintenance on the hardware and its embedded software, including rights to technical support, hardware repairs and software updates that are all provided over the same term and have the same time-based pattern of transfer to the customer. The portion of the transaction price allocated to the hardware product is generally recognized as revenue at a point in time when the hardware is delivered to the customer. The Company has concluded that control generally transfers upon delivery because the customer has title to the hardware, physical possession of the hardware, and a present

10



obligation to pay for the hardware. The portion of the transaction price allocated to maintenance is recognized as revenue that is ratable over the maintenance term. The adoption of ASC 606 did not change the timing of revenue recognition for hardware products and related services.
Professional Services
Our arrangements often include service elements (other than maintenance and support services). These services include training, design assistance, and consulting. Services performed on a time and materials basis are recognized over time, as the customer simultaneously receives and consumes the benefit provided. Certain arrangements also include the customization or modification of licensed IP. Revenue from these contracts is recognized over time as the services are performed, when the development is specific to the customer’s needs and Synopsys has enforceable rights to payment for performance completed. Performance is generally measured using costs incurred or hours expended to measure progress. The Company has a history of accurately estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances, specification and testing requirement changes, and changes in customer delivery priorities. Payments for services are generally due upon milestones in the contract or upon consumption of the hourly resources.
Flexible Spending Accounts
Some customers enter into a non-cancelable Flexible Spending Account arrangement (FSA) whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of Synopsys products or services. These arrangements do not meet the definition of a revenue contract until the customer executes a separate order to identify the required products and services that they are purchasing. The combination of the FSA arrangement and the subsequent order creates enforceable rights and obligations, thus meeting the definition of a revenue contract. Each separate order under the agreement is treated as an individual contract under the new standard and accounted for based on the respective performance obligations included within the FSA arrangements.
Disaggregated Revenue
The following table shows the percentage of revenue by product groups:
 
Three Months Ended 
 April 30, 2019
 
Six Months Ended 
 April 30, 2019
 
2019
 
2018
 
2019
 
2018
EDA
58
%
 
62
%
 
59
%
 
63
%
IP & System Integration
31
%
 
29
%
 
30
%
 
29
%
Software Integrity Products & Services
10
%
 
9
%
 
10
%
 
8
%
Other
1
%
 
%
 
1
%
 
%
Total
100
%
 
100
%
 
100
%
 
100
%
Judgments
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether services and products are considered distinct performance obligations that should be accounted for separately versus together requires significant judgment. The Company has concluded that (1) its EDA software licenses in TSL contracts are not distinct from its obligation to provide unspecified software updates to the licensed software throughout the license term, because those promises represent inputs to a single, combined performance obligation, and (2) where unspecified additional software product rights are part of the contract with the customer, such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support, because such rights are provided for the same period of time and have the same time-based pattern of transfer to the customer. In reaching this conclusion, the Company considered the nature of the obligation to customers which is to provide an ongoing right to use the most up to date and relevant software. As EDA customers operate in a rapidly changing and competitive environment, satisfying the obligation requires providing critical updates to the existing software products, including ongoing iterative interaction with customers to make the software relevant to customers’ ability to meet the time to go to market with advanced products.
Similarly, the Company also concluded that in its Software Integrity business, the licenses and maintenance updates serve together to fulfill the Company’s commitment to the customer as both work together to provide the

11



functionality to the customer and represent a combined performance obligation because the updates are essential to the software’s central utility, which is to identify security vulnerabilities and other threats.

Judgment is also required to determine the standalone selling price (SSP) for each distinct performance obligation. For non-software performance obligations (IP, Hardware, and services), SSP is established based on observable prices of products and services sold separately. SSP for license (and related updates and support) in a contract with multiple performance obligations is determined by applying a residual approach whereby all other non-software performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSP, using observable prices, with any residual amount of the transaction price allocated to the license because the Company does not sell the license separately, and the pricing is highly variable.
Contract Balances  
The timing of revenue recognition may differ from the timing of invoicing to customers, and these timing differences result in receivables (billed or unbilled), contract assets, or contract liabilities (deferred revenue) on the Company’s unaudited condensed consolidated balance sheet. The Company records a contract asset when revenue is recognized prior to the right to invoice, or deferred revenue when revenue is recognized subsequent to invoicing. For time-based software agreements, customers are generally invoiced in equal, quarterly amounts, although some customers prefer to be invoiced in single or annual amounts. The Company records an unbilled receivable when revenue is recognized and it has an unconditional right to invoice and receive payment.
The contract assets indicated below are presented as prepaid and other current assets in the unaudited condensed consolidated balance sheet. The contract assets are transferred to receivables when the rights to invoice and receive payment become unconditional.
Contract balances are as follows:
 
As of April 30, 2019
 
As of October 31, 2018
 
 
 
as adjusted
 
(in thousands)
Contract assets
$
168,487

 
$
126,897

Unbilled receivables
38,133

 
36,699

Deferred revenue
1,255,229

 
1,104,110


During the three and six months ended April 30, 2019, the Company recognized $474.4 million and $961.5 million, respectively, of revenue that were included in the deferred revenue balance at the beginning of the period, as adjusted for the adoption of ASC 606.
Contracted but unsatisfied or partially unsatisfied performance obligations were approximately $4.3 billion as of April 30, 2019, which includes $512.3 million in non-cancellable FSA commitments from customers where actual product selection and quantities of specific products or services are to be determined by customers at a later date. The Company has elected to exclude future sales-based royalty payments from the remaining performance obligations. The contracted unsatisfied performance obligations, excluding non-cancellable FSA, expected to be recognized over the next 12 months is approximately 52%, with the remainder recognized thereafter.
During the three and six month periods ended April 30, 2019, the Company recognized $28.5 million and $47.3 million, respectively, from performance obligations satisfied in previous periods. These amounts represent sales based royalties earned during the periods.
Costs of Obtaining a Contract with Customer
The incremental costs of obtaining a contract with a customer, which consist primarily of direct sales commissions earned upon execution of the contract, are required to be capitalized under ASC 340-40 and amortized over the estimated period of which the benefit is expected to be received. As direct sales commissions paid for renewals are commensurate with the amounts paid for initial contracts, the deferred incremental costs will be recognized over the contract term. Total capitalized direct commission costs as of April 30, 2019 were $96.4 million and are included in other assets in the Company’s unaudited condensed consolidated balance sheet. Amortization of these assets was $15.6 million and $28.4 million during the three and six months ended April 30, 2019, respectively, and are included

12



in sales and marketing expense in the Company’s unaudited condensed consolidated statements of operations.
Note 3. Goodwill and Intangible Assets
Following the realignment of the Company’s operating segments during the first quarter of fiscal 2019, as described in Note 12. Segment Disclosure, the Company has two reporting units and has assigned assets and liabilities to each of the reporting units based on each unit's operating activities. Previously, the Company operated as a single reporting segment and reporting unit. Goodwill was reallocated to the reporting units using a relative fair value method and assessed for impairment. No impairment of goodwill was identified for any periods presented.

Intangible assets as of April 30, 2019 consisted of the following:
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
773,147

 
$
629,360

 
$
143,787

Customer relationships
358,522

 
223,374

 
135,148

Contract rights intangible
183,947

 
179,167

 
4,780

Trademarks and trade names
42,929

 
24,025

 
18,904

In-process research and development (IPR&D)(1)
1,200

 

 
1,200

Capitalized software development costs
37,309

 
34,201

 
3,108

Total
$
1,397,054

 
$
1,090,127

 
$
306,927


(1)
IPR&D is reclassified to core/developed technology upon completion or is written off upon abandonment.

Intangible assets as of October 31, 2018 consisted of the following:
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
773,147

 
$
598,956

 
$
174,191

Customer relationships
358,524

 
204,382

 
154,142

Contract rights intangible
183,953

 
177,191

 
6,762

Trademarks and trade names
42,929

 
21,944

 
20,985

In-process research and development (IPR&D)(1)
1,200

 

 
1,200

Capitalized software development costs
35,818

 
32,694

 
3,124

Total
$
1,395,571

 
$
1,035,167

 
$
360,404




13



Amortization expense related to intangible assets consisted of the following:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Core/developed technology
$
14,045

 
$
18,985

 
$
30,404

 
$
37,053

Customer relationships
9,377

 
9,656

 
18,957

 
18,219

Contract rights intangible
866

 
1,372

 
1,982

 
2,262

Trademarks and trade names
909

 
1,172

 
2,081

 
2,198

Capitalized software development costs(2)
735

 
897

 
1,507

 
1,817

Total
$
25,932

 
$
32,082

 
$
54,931

 
$
61,549


(2)
Amortization of capitalized software development costs is included in cost of products revenue in the unaudited condensed consolidated statements of operations.
The following table presents the estimated future amortization of the existing intangible assets as of April 30, 2019:
Fiscal Year
(in thousands)
Remainder of fiscal 2019
$
48,131

2020
78,806

2021
56,118

2022
44,006

2023
29,219

2024 and thereafter
49,447

IPR&D(3)
1,200

Total
$
306,927

(3)
IPR&D assets are amortized over their useful lives upon completion or are written off upon abandonment.

Note 4. Financial Assets and Liabilities
Cash equivalents. The Company classifies time deposits and other investments with original maturities less than three months as cash equivalents.
As of April 30, 2019, the balances of the Company's cash equivalents are:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses Less Than 12 Continuous Months
 
Gross
Unrealized
Losses 12 Continuous Months or Longer
 
Estimated
Fair Value(1)
 
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
 
Money market funds
$
206,438

 
$

 
$

 
$

 
$
206,438

Total:
$
206,438

 
$

 
$

 
$

 
$
206,438

(1)
See Note 5. Fair Value Measures for further discussion on fair values of cash equivalents.

14



As of October 31, 2018, the balances of the Company's cash equivalents are:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses Less Than 12 Continuous Months
 
Gross
Unrealized
Losses 12 Continuous Months or Longer
 
Estimated
Fair Value(1)
 
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
 
Money market funds
$
165,296

 
$

 
$

 
$

 
$
165,296

Total:
$
165,296

 
$

 
$

 
$

 
$
165,296

(1)
See Note 5. Fair Value Measures for further discussion on fair values of cash equivalents.
Restricted Cash. In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The Company adopted the standard in the first quarter of fiscal 2019 and applied it retrospectively for the periods presented. As required by ASU 2016-18, the Company included amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. All restricted cash is primarily associated with office leases and has no material impact on the Company’s unaudited condensed consolidated statement of cash flows.
The following table provides a reconciliation of cash, cash equivalents and restricted cash included in the unaudited condensed consolidated balance sheets:
 
As of April 30, 2019
 
As of October 31, 2018
 
(in thousands)
Cash and cash equivalents
$
631,161

 
$
723,115

Restricted cash included in Prepaid expenses and other current assets
1,166

 
1,164

Restricted cash included in Other long-term assets
721

 
722

Total cash, cash equivalents and restricted cash
$
633,048

 
$
725,001


Non-marketable equity securities. The Company’s strategic investment portfolio consists of non-marketable equity securities in privately-held companies. The securities accounted for under cost method investments are reported at cost net of impairment losses. Securities accounted for under equity method investments are recorded at cost plus the proportional share of the issuers’ income or loss, which is recorded in the Company’s other income (expense), net. The cost basis of securities sold is based on the specific identification method. Refer to Note 5. Fair Value Measures.
Derivatives. The Company recognizes derivative instruments as either assets or liabilities in the unaudited condensed consolidated balance sheets at fair value and provides qualitative and quantitative disclosures about such derivatives. The Company operates internationally and is exposed to potentially adverse movements in foreign currency exchange rates. The Company enters into hedges in the form of foreign currency forward contracts to reduce its exposure to foreign currency rate changes on non-functiona