Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(MARK ONE)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2009

 

OR

 

o

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
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

700 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)

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of June 5, 2009, there were 144,164,393 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

SYNOPSYS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED APRIL 30, 2009

 

TABLE OF CONTENTS

 

 

Page

PART I.

Financial Information

1

ITEM 1.

Financial Statements

1

 

Unaudited Condensed Consolidated Balance Sheets

1

 

Unaudited Condensed Consolidated Statements of Operations

2

 

Unaudited Condensed Consolidated Statements of Cash Flows

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

26

ITEM 4.

Controls and Procedures

26

PART II

Other Information

27

ITEM 1

Legal Proceedings

27

ITEM 1A.

Risk Factors

27

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

ITEM 3.

Defaults Upon Senior Securities

35

ITEM 4.

Submission of Matters to a Vote of Security Holders

35

ITEM 5.

Other Information

36

ITEM 6.

Exhibits

36

Signatures

 

37

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amounts)

 

 

 

April 30,
2009

 

October 31,
2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

506,399

 

$

577,632

 

Short-term investments

 

370,448

 

373,669

 

Total cash, cash equivalents and short-term investments

 

876,847

 

951,301

 

Accounts receivable, net of allowances of $4,354 and $2,338, respectively

 

189,115

 

147,365

 

Deferred income taxes

 

131,290

 

133,609

 

Income taxes receivable

 

47,651

 

49,859

 

Other current assets

 

50,094

 

40,156

 

Total current assets

 

1,294,997

 

1,322,290

 

Property and equipment, net

 

136,799

 

145,087

 

Goodwill

 

917,287

 

899,640

 

Intangible assets, net

 

99,343

 

114,760

 

Long-term deferred income taxes

 

165,600

 

177,386

 

Other long-term assets

 

82,025

 

83,315

 

Total assets

 

$

2,696,051

 

$

2,742,478

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

176,233

 

$

289,769

 

Accrued income taxes

 

9,256

 

14,496

 

Deferred revenue

 

540,609

 

604,718

 

Total current liabilities

 

726,098

 

908,983

 

Long-term accrued income taxes

 

151,816

 

152,745

 

Deferred compensation and other liabilities

 

76,335

 

76,970

 

Long-term deferred revenue

 

47,856

 

75,409

 

Total liabilities

 

1,002,105

 

1,214,107

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value: 400,000 shares authorized; 144,122 and 141,786 shares outstanding, respectively

 

1,441

 

1,418

 

Capital in excess of par value

 

1,487,096

 

1,471,031

 

Retained earnings

 

522,129

 

434,057

 

Treasury stock, at cost: 13,149 and 15,485 shares, respectively

 

(291,129

)

(342,856

)

Accumulated other comprehensive loss

 

(25,591

)

(35,279

)

Total stockholders’ equity

 

1,693,946

 

1,528,371

 

Total liabilities and stockholders’ equity

 

$

2,696,051

 

$

2,742,478

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenue:

 

 

 

 

 

 

 

 

 

Time-based license

 

$

283,996

 

$

278,220

 

$

569,048

 

$

546,080

 

Upfront license

 

15,994

 

12,214

 

34,321

 

24,735

 

Maintenance and service

 

36,845

 

34,119

 

73,221

 

69,203

 

Total revenue

 

336,835

 

324,553

 

676,590

 

640,018

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

License

 

42,292

 

41,709

 

84,115

 

82,107

 

Maintenance and service

 

15,048

 

16,167

 

30,627

 

32,046

 

Amortization of intangible assets

 

7,679

 

5,816

 

15,701

 

10,849

 

Total cost of revenue

 

65,019

 

63,692

 

130,443

 

125,002

 

Gross margin

 

271,816

 

260,861

 

546,147

 

515,016

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

102,996

 

95,275

 

200,803

 

187,789

 

Sales and marketing

 

82,520

 

82,887

 

159,904

 

160,257

 

General and administrative

 

28,691

 

26,171

 

55,873

 

50,012

 

In-process research and development

 

 

 

600

 

 

Amortization of intangible assets

 

2,941

 

6,591

 

6,727

 

13,182

 

Total operating expenses

 

217,148

 

210,924

 

423,907

 

411,240

 

Operating income

 

54,668

 

49,937

 

122,240

 

103,776

 

Other income, net

 

10,445

 

151

 

12,544

 

6,481

 

Income before provision for income taxes

 

65,113

 

50,088

 

134,784

 

110,257

 

Provision for income taxes

 

16,825

 

_10,701

 

34,067

 

24,425

 

Net income

 

$

48,288

 

$

39,387

 

$

100,717

 

$

85,832

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

$

0.28

 

$

0.71

 

$

0.60

 

Diluted

 

$

0.33

 

$

0.27

 

$

0.70

 

$

0.58

 

Shares used in computing per share amounts:

 

 

 

 

 

 

 

 

 

Basic

 

143,275

 

141,844

 

142,562

 

143,926

 

Diluted

 

145,421

 

145,271

 

144,024

 

147,801

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended
April 30,,

 

 

 

2009

 

2008

 

Cash flow from operating activities:

 

 

 

 

 

Net income

 

$

100,717

 

$

85,832

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Amortization and depreciation

 

49,728

 

50,244

 

Share-based compensation

 

28,803

 

33,486

 

Allowance for doubtful accounts

 

2,723

 

429

 

Write-down of long-term investments

 

2,960

 

 

(Gain) on sale of investments

 

(324

)

(1,192

)

Deferred income taxes

 

7,612

 

3,523

 

Net change in deferred gains and losses on cash flow hedges

 

2,664

 

7,495

 

In-process research and development

 

600

 

 

Net changes in operating assets and liabilities, net of acquired assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(46,707

)

(46,982

)

Other current assets

 

(7,521

)

(10,300

)

Other long-term assets

 

248

 

26

 

Accounts payable and accrued liabilities

 

(104,225

)

(69,502

)

Accrued income taxes

 

(5,959

)

(2,873

)

Deferred revenue

 

(88,065

)

(67,309

)

Deferred compensation and other liabilities

 

(469

)

980

 

Net cash used in operating activities

 

(57,215

)

(16,143

)

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales and maturities of short-term investments

 

123,041

 

419,181

 

Purchases of short-term investments

 

(119,227

)

(253,699

)

Purchases of long-term investments

 

 

(6,694

)

Sales of long-term investments

 

 

77

 

Purchases of property and equipment

 

(14,734

)

(19,498

)

Cash paid for acquisitions

 

(27,333

)

 

Capitalization of software development costs

 

(1,485

)

(1,408

)

Net cash (used in) provided by investing activities

 

(39,738

)

137,959

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on capital leases

 

(984

)

(1,452

)

Issuances of common stock

 

26,652

 

36,949

 

Purchases of treasury stock

 

 

(170,052

)

Net cash provided by (used in) financing activities

 

25,668

 

(134,555

)

Effect of exchange rate changes on cash and cash equivalents

 

52

 

8,301

 

Net change in cash and cash equivalents

 

(71,233

)

(4,438

)

Cash and cash equivalents, beginning of year

 

577,632

 

579,327

 

Cash and cash equivalents, end of period

 

$

506,399

 

$

574,889

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

SYNOPSYS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.     Description of Business

 

Synopsys, Inc. (Synopsys or the Company) is a world leader in electronic design automation (EDA), supplying the global electronics market with software, intellectual property (IP) and services used in semiconductor design and manufacturing. The Company delivers technology-leading semiconductor design and verification platforms and integrated circuit (IC) manufacturing related products to the global electronics market, enabling the development and production of complex systems-on-chips (SoCs). In addition, the Company provides IP, system-level solutions and design services to simplify the design process and accelerate time-to-market for its customers, and software and services that help customers prepare and optimize their designs for manufacturing.

 

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 (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 financial position, results of operations 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, 2008 filed with the SEC on December 22, 2008.

 

To prepare financial statements in conformity with 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 consolidated financial statements include the accounts of the Company and all of its    subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Fiscal Year End.  The Company has adopted a fiscal year ending on the Saturday nearest to October 31. The Company’s second quarter of fiscal 2009 ended on May 2, 2009.  Fiscal 2009 and 2008 are both 52-week fiscal years.  For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the applicable calendar month end.

 

Note 3.     Fair Value Measurements of Financial Assets and Liabilities

 

Effective November 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes guidelines and enhances disclosures for fair value measurements.  In February 2008, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) FSP 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until the Company’s fiscal year 2010. SFAS 157 clarifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In addition to defining fair value, SFAS 157 establishes a three-tier fair value hierarchy that encourages the use of observable inputs but allows for unobservable inputs when observable inputs do not exist:

 

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical instruments in active markets;

 

Level 2—Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets; and

 

Level 3—Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In accordance with SFAS 157, the Company’s cash equivalents, short-term investments, and marketable equity security are classified within Level 1 or Level 2. These classifications are based on the fact that cash equivalents and marketable securities are valued using quoted market prices in an active market or alternative pricing sources and models utilizing market observable inputs.

 

The Company’s foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

 

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Table of Contents

 

The Company’s deferred compensation plan assets and liabilities are classified within Level 2 as the inputs to measure the fair value are only indirectly observable.  The deferred compensation plan assets and liabilities consist of mutual funds invested in domestic and international marketable securities.

 

The Company’s strategic investments in privately held companies are classified within Level 3 as most of the inputs used to value the investments are unobservable.

 

Assets/Liabilities Measured at Fair Value on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis are summarized below as of April 30, 2009:

 

 

 

 

 

Fair Value Measurement at Reporting Date Using

 

Description

 

Total as of
April 30, 2009

 

Quoted Prices in Active
Markets for Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

311,156

 

$

311,156

 

$

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Municipal securities

 

370,448

 

 

370,448

 

 

Other current assets:

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

8,160

 

 

8,160

 

 

Other long-term assets:

 

 

 

 

 

 

 

 

 

Marketable equity security(1)

 

565

 

565

 

 

 

Deferred compensation plan assets

 

61,549

 

2

 

61,547

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

751,878

 

$

311,723

 

$

440,155

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Account payable and accrued liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

$

13,435

 

$

 

$

13,435

 

$

 

Deferred compensation and other liabilities:

 

 

 

 

 

 

 

 

 

Deferred compensation plan liabilities

 

61,639

 

 

61,639

 

 

Total liabilities

 

$

75,074

 

$

 

$

75,074

 

$

 

 


(1) During the six months ended April 30, 2009, the Company recorded $0.9 million of other-than-temporary impairment charges in other income, net, due to the decline of the stock price of a public company in its long-term investment portfolio.

 

Assets/Liabilities Measured at Fair Value on a Non-recurring Basis

 

Equity investments in privately-held companies are accounted for under the cost method of accounting.  These equity investments (also called non-marketable equity investments) are classified within Level 3 as they are valued using unobservable data or data in an inactive market.  The Company evaluates the fair value of each investment when an event or circumstance indicates an other-than-temporary decline in value has occurred. During the six months ended April 30, 2009, the Company determined that only one investment had impairment indicators and thus calculated the fair value of this investment by determining what a willing buyer would pay to purchase the investment using a financial model based on cash flow projections of the investment.  As a result of the fair value measurement, the Company recorded $2.1 million of other-than-temporary impairment charges on the investment in other income, net, on the unaudited condensed consolidated statement of operations in the six months ended April 30, 2009.

 

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Table of Contents

 

The following table presents the equity investment subject to fair value measurement on a non-recurring basis as of April 30, 2009, and the loss recorded during the six months ended April 30, 2009:

 

 

 

 

 

 

 

Total gains

 

Total gains

 

 

 

 

 

Significant

 

(losses) for the

 

(losses) for the

 

 

 

 

 

Unobservable

 

three months

 

six months

 

 

 

Total as of

 

Inputs

 

ended

 

ended

 

 

 

April 30, 2009

 

(Level 3)

 

April 30, 2009

 

April 30, 2009

 

 

 

(in thousands)

 

Non-marketable equity investment

 

$

1,080

 

$

1,080

 

$

 

$

(2,090

)

 

Effective January 1, 2009, the Company also adopted SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment of FASB Statement No. 115. Under this statement, entities may choose to measure certain financial instruments and liabilities at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings. The Company did not elect such option for its financial instruments and liabilities.

 

Derivatives

 

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133), requires companies to recognize derivative instruments as either assets or liabilities in the statement of financial position at fair value. SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (SFAS 161), requires qualitative disclosures about the objectives and strategies for using derivatives and quantitative disclosures about the volume and gross fair value amounts of derivatives. The Company adopted SFAS 161 in the second quarter of fiscal 2009. Since SFAS 161 only required additional disclosure, the adoption did not impact the Company’s consolidated financial position, results of operations or cash flows.

 

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-functional currency denominated forecasted transactions and balance sheet positions including: (1) certain assets and liabilities, (2) shipments forecasted to occur within approximately one month, (3) future billings and revenue on previously shipped orders, and (4) certain future intercompany invoices denominated in foreign currencies.

 

The duration of forward contracts ranges from one month to 19 months. The Company does not use foreign currency forward contracts for speculative or trading purposes. The Company enters into foreign exchange forward contracts with high credit quality financial institutions that are rated ‘A’ or above and to date has not experienced nonperformance by counterparties. Further, the Company anticipates continued performance by all counterparties to such agreements.

 

The assets or liabilities associated with the forward contracts are recorded at fair value in other current assets or other current liabilities in the unaudited condensed consolidated balance sheet in accordance with SFAS 133. The accounting for gains and losses resulting from changes in fair value depends on the use of the foreign currency forward contract and whether it is designated and qualifies for hedge accounting.

 

Cash Flow Hedging Activities

 

Certain foreign exchange forward contracts are designated and qualify as cash flow hedges under SFAS 133. To receive hedge accounting treatment, all hedging relationships are formally documented at inception of the hedge and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of gains or losses resulting from changes in fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassified into revenue or operating expenses, as appropriate, at the time the forecasted transactions affect earnings. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is approximately three years. The duration of the forward contracts is generally approximately one year or less, except for forward contracts denominated in Canadian dollar, Chinese yuan, British pound, Euro, Indian rupee and Taiwan dollar, which can have durations as long as 19 months.

 

Hedging effectiveness is evaluated monthly using spot rates, with any gain or loss caused by hedging ineffectiveness recorded in earnings as other income, net. The premium/discount component of the forward contracts is recorded to other income, net and is not included in evaluating hedging effectiveness.

 

Non-designated Hedging Activities

 

The Company’s foreign exchange forward contracts that are used to hedge non-functional currency denominated balance sheet assets and liabilities are not designated as hedging instruments under SFAS 133. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income, net. The gains and losses on these forward contracts generally offset the gains and losses associated with the underlying assets and liabilities, which are also recorded in other income, net. The duration of the forward contracts for hedging the Company’s balance sheet exposure is approximately one month.

 

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The Company also has certain foreign exchange forward contracts for hedging certain international revenue and expenses that are not designated as hedging instruments under SFAS  133. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income, net. The gains and losses on these forward contracts generally offset the gains and losses associated with the foreign currency in operating income. The duration of these forward contracts is usually less than 1 year.

 

The overall goal of the Company’s comprehensive hedging program is to minimize the impact of currency fluctuations on its net income over its fiscal year.

 

During the three and six months ended April 30, 2009, $3.9 million and $6.1 million of gains were recorded in other income, net from changes in fair values of non-designated forward contracts.

 

As of April 30, 2009, the Company had a total net notional amount of $196.2 million of short-term foreign currency forward contracts outstanding with net fair market liability of $5.3 million.

 

The notional principal amounts for derivative instruments provide one measure of the transaction volume outstanding as of April 30, 2009, and do not represent the amount of the Company’s exposure to market loss. The Company’s exposure to market loss will vary over time as a function of currency exchange rates. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

 

The following represents the balance sheet location and amount of derivative instrument fair values segregated between designated and non-designated hedge instruments under SFAS 133 as of April 30, 2009:

 

 

 

Fair Values of
derivative instruments
designated as hedging
instruments under
SFAS 133

 

Fair Values of
derivative instruments
not designated as
hedging instruments
under SFAS 133

 

 

 

(in thousands)

 

Other current assets

 

$

4,868

 

$

3,292

 

Other current liabilities

 

$

13,130

 

$

304

 

 

The following table represents the income statement location and amount of gains and losses on derivative instrument fair values for designated hedge instruments under SFAS 133 for the three and six months ended April 30, 2009:

 

 

 

Location of gain(loss)
recognized in OCI on
derivatives

 

Amount of gain(loss)
recognized in OCI on
derivatives (effective
portion)(1)

 

Location of
gain(loss)
reclassified from
OCI

 

Amount of
gain(loss)
reclassified from
OCI (effective
portion)(1)

 

 

 

(in thousands)

 

Three months ended

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Revenue

 

$

2,547

 

Revenue

 

$

1,906

 

Foreign exchange contracts

 

Operating expenses

 

(2,164

)

Operating expenses

 

(5,995

)

Total

 

 

 

$

383

 

 

 

$

(4,089

)

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Revenue

 

$

2,113

 

Revenue

 

$

2,282

 

Foreign exchange contracts

 

Operating expenses

 

485

 

Operating expenses

 

(10,703

)

Total

 

 

 

$

2,598

 

 

 

$

(8,421

)

 


(1) Refer to Note 8.

 

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Table of Contents

 

The following table represents the ineffective portions of the hedge gains (losses) for derivative instruments designated as hedging instruments under SFAS 133 during the three and six months ended April 30, 2009:

 

 

 

Location of gain(loss)
recognized in income on
derivatives (ineffective
portion and excluded
from effectiveness
testing)

 

Amount of gain(loss)
recognized in income
statement on
derivatives
(ineffective
portion)(1)

 

Amount of gain(loss)
recognized in income
statement on derivatives
(excluded from
effectiveness testing)(2)

 

 

 

(in thousands)

 

Three months ended

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income, net

 

$

13

 

$

1,480

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income, net

 

$

38

 

$

3,044

 

 


(1) The ineffective portion includes forecast inaccuracies.

(2) The portion excluded from effectiveness includes the discount earned or premium paid for the contracts.

 

Note 4.     Business Combinations

 

On December 18, 2008, the Company acquired the assets of a business for cash and incurred acquisition related costs.  The Company preliminarily allocated the total purchase consideration to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the acquisition date, resulting in goodwill of $19.8 million, in process research and development expense of $0.6 million, and identifiable intangible assets of $6.9 million.  The intangible assets are being amortized over one to six years. Goodwill, which is deductible for tax purposes, represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and will not be amortized.

 

Note 5.     Goodwill and Intangible Assets

 

Goodwill as of April 30, 2009 consisted of the following:

 

 

 

(in thousands)

 

Balance at October 31, 2008

 

$

899,640

 

Addition(1)

 

19,837

 

Other adjustments(2)

 

(2,190

)

Balance at April 30, 2009

 

$

917,287

 

 


(1)          Addition relates to an acquisition of assets of a business as described in Note 4 above.

(2)          Adjustments relate to reduction of merger costs and income tax adjustments for prior year acquisitions.

 

Intangible assets as of April 30, 2009 consisted of the following:

 

 

 

Gross Assets

 

Accumulated
Amortization

 

Net Assets

 

 

 

(in thousands)

 

Core/developed technology

 

$

132,731

 

$

73,964

 

$

58,767

 

Customer relationships

 

174,620

 

143,023

 

31,597

 

Contract rights intangible

 

12,600

 

9,890

 

2,710

 

Covenants not to compete

 

3,100

 

2,314

 

786

 

Trademarks and trade names

 

2,700

 

618

 

2,082

 

Capitalized software development costs

 

10,349

 

6,948

 

3,401

 

Total

 

$

336,100

 

$

236,757

 

$

99,343

 

 

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Table of Contents

 

Intangible assets as of October 31, 2008 consisted of the following:

 

 

 

Gross Assets

 

Accumulated
Amortization

 

Net Assets

 

 

 

(in thousands)

 

Core/developed technology

 

$

128,231

 

$

59,577

 

$

68,654

 

Customer relationships

 

172,420

 

137,106

 

35,314

 

Contract rights intangible

 

12,500

 

8,362

 

4,138

 

Covenants not to compete

 

3,100

 

2,006

 

1,094

 

Trademarks and trade names

 

2,600

 

330

 

2,270

 

Capitalized software development costs

 

8,784

 

5,494

 

3,290

 

Total

 

$

327,635

 

$

212,875

 

$

114,760

 

 

Amortization expense related to intangible assets consisted of the following:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Core/developed technology

 

$

6,998

 

$

5,354

 

$

14,387

 

$

9,916

 

Customer relationships

 

2,554

 

6,197

 

5,917

 

12,394

 

Contract rights intangible

 

767

 

679

 

1,528

 

1,367

 

Covenant not to compete

 

154

 

166

 

308

 

333

 

Trademark and trade names

 

147

 

10

 

288

 

20

 

Capitalized software development costs(1)

 

732

 

721

 

1,454

 

1,449

 

Total

 

$

11,352

 

$

13,127

 

$

23,882

 

$

25,479

 

 


(1)          Amortization of capitalized software development costs is included in cost of license revenue in the unaudited condensed consolidated statements of operations.

 

The following table presents the estimated future amortization of intangible assets:

 

Fiscal Year

 

(in thousands)

 

Remainder of fiscal 2009

 

$

22,361

 

2010

 

32,788

 

2011

 

21,307

 

2012

 

13,056

 

2013

 

5,776

 

2014 and thereafter

 

4,055

 

Total

 

$

99,343

 

 

Note 6.     Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consisted of the following:

 

 

 

April 30,

 

October 31,

 

 

 

2009

 

2008

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

115,760

 

$

188,344

 

Other accrued liabilities

 

49,377

 

74,297

 

Accounts payable

 

8,661

 

23,168

 

Acquisition related costs

 

2,435

 

3,960

 

Total

 

$

176,233

 

$

289,769

 

 

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Note 7.     Credit Facility

 

On October 20, 2006, the Company entered into a five-year, $300.0 million senior unsecured revolving credit facility providing for loans to the Company and certain of its foreign subsidiaries. The amount of the facility may be increased by up to an additional $150.0 million through the fourth year of the facility. The facility contains financial covenants requiring the Company to maintain a minimum leverage ratio and specified levels of cash, as well as other non-financial covenants. The facility terminates on October 20, 2011. Borrowings under the facility bear interest at the greater of the administrative agent’s prime rate or the federal funds rate plus 0.50%; however, the Company has the option to pay interest based on the outstanding amount at Eurodollar rates plus a spread between 0.50% and 0.70% based on a pricing grid tied to a financial covenant. In addition, commitment fees are payable on the facility at rates between 0.125% and 0.175% per year based on a pricing grid tied to a financial covenant. As of April 30, 2009, the Company had no outstanding borrowings under this credit facility and was in compliance with all the covenants.

 

Note 8.     Comprehensive Income

 

The following table presents the components of comprehensive income:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Net income

 

$

48,288

 

$

39,387

 

$

100,717

 

$

85,832

 

Change in unrealized (losses) gains on investments, net of tax of $289 and ($1,336), for the three and six months ended April 30, 2009, respectively, and of $1,275 and $598 for each of the same periods in fiscal 2008, respectively

 

(438

)

(1,932

)

2,024

 

(906

)

Deferred gains (losses) on cash flow hedges, net of tax of $1,288 and ($66), for the three and six months ended April 30, 2009, respectively, and of ($758) and ($1,537) for each of the same periods in fiscal 2008, respectively

 

383

 

3,854

 

2,598

 

5,958

 

Reclassification adjustment on deferred (gains) losses on cash flow hedges, net of tax of ($582) and ($1,708), for the three and six months ended April 30, 2009, respectively, and of $921 and $1,109 for each of the same periods in fiscal 2008, respectively

 

4,089

 

(3,010

)

8,421

 

(4,110

)

Foreign currency translation adjustment

 

(2,482

)

943

 

(3,355

)

(1,431

)

Total

 

$

49,840

 

$

39,242

 

$

110,405

 

$

85,343

 

 

Note 9.     Stock Repurchase Program

 

The Company is authorized to purchase up to $500.0 million of its common stock under a stock repurchase program originally established by the Company’s Board of Directors (Board) in December 2004 and replenished to $500.0 million in March 2007.  The Company repurchases shares to offset dilution caused by ongoing stock issuances from existing plans for equity compensation awards, acquisitions, and when management believes it is a good use of cash.  Repurchases are transacted in accordance with Rule 10b-18 under the Securities Exchange Act of 1934 (Exchange Act) through open market purchases, plans executed under Rule 10b5-1 under the Exchange Act and structured transactions.

 

There were no stock repurchases during the three and six months ended April 30, 2009. During the three and six months ended April 30, 2008, the Company purchased 3.8 million shares at an average price of $23.06 per share, and 7.2 million shares at an average price of $23.64 per share, respectively. During the three and six months ended April 30, 2009, approximately 2.1 million and 2.3 million shares were reissued from treasury stock, respectively, for employee share-based compensation requirements. During the three and six months ended April 30, 2008, approximately 1.8 million and 2.5 million shares were reissued from treasury stock, respectively, for employee share-based compensation requirements. As of April 30, 2009, $209.7 million remained available for future purchases under the program.

 

Note 10.   Share-based Compensation

 

The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options and employee stock purchase plan awards under SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS123(R)). The Black-Scholes option-pricing model incorporates various subjective assumptions including expected volatility, expected term and interest rates. The expected

 

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volatility for both stock options and employee stock purchase plan (ESPP) is estimated by a combination of implied volatility for publicly traded options of the Company’s stock with a term of six months or longer and the historical stock price volatility over the estimated expected term of the Company’s share-based awards. The expected term of the Company’s share-based awards is based on historical experience.

 

As of April 30, 2009, there was $109.0 million of unamortized share-based compensation expense which is expected to be amortized over a weighted-average period of approximately 2.4 years. The intrinsic values of options exercised during the three and six months ended April 30, 2009 were $1.4 million and $1.6 million, respectively. The intrinsic values of options exercised during the three and six months ended April 30, 2008 were $3.6 million and $8.7 million, respectively.

 

The compensation cost recognized in the unaudited condensed consolidated statements of operations for these share-based compensation arrangements was as follows:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Cost of license

 

$

1,729

 

$

2,296

 

$

3,373

 

$

3,624

 

Cost of maintenance and service

 

543

 

810

 

1,090

 

2,152

 

Research and development expense

 

6,193

 

7,444

 

12,171

 

13,863

 

Sales and marketing expense

 

3,139

 

4,351

 

6,260

 

8,051

 

General and administrative expense

 

3,057

 

2,940

 

5,909

 

5,796

 

Share-based compensation expense before taxes

 

14,661

 

17,841

 

28,803

 

33,486

 

Income tax benefit

 

(3,338

)

(4,184

)

(6,558

)

(7,852

)

Share-based compensation expense after taxes

 

$

11,323

 

$

13,657

 

$

22,245

 

$

25,634

 

 

Note 11.   Net Income per Share

 

The Company computes basic income per share by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the dilution of potential common shares outstanding such as stock options and unvested restricted stock units and awards during the period using the treasury stock method.

 

The tables below illustrate the weighted-average common shares used to calculate basic net income per share with the weighted-average common shares used to calculate diluted net income per share:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

48,288

 

$

39,387

 

$

100,717

 

$

85,832

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares for basic net income per share

 

143,275

 

141,844

 

142,562

 

143,926

 

Dilutive effect of common share equivalents from equity-based compensation

 

2,146

 

3,427

 

1,462

 

3,875

 

Weighted-average common shares for diluted net income per share

 

145,421

 

145,271

 

144,024

 

147,801

 

 

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Table of Contents

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

$

0.28

 

$

0.71

 

$

0.60

 

Diluted

 

$

0.33

 

$

0.27

 

$

0.70

 

$

0.58

 

 

Diluted net income per share excludes 18.1 million and 13.0 million of anti-dilutive stock options and unvested restricted stock units and awards for the three months ended April 30, 2009 and 2008, respectively; and 19.6 million and 9.8 million of anti-dilutive options and unvested restricted stock units and awards for the six months ended April 30, 2009 and 2008, respectively.  While these stock options and unvested restricted stock units and awards were anti-dilutive for the respective periods, they could be dilutive in the future.

 

Note 12.   Segment Disclosure

 

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS 131) requires disclosures of certain information regarding operating segments, products and services, geographic areas of operation and major customers. SFAS 131 reporting is based upon the “management approach,” i.e., how management organizes the Company’s operating segments for which separate financial information is (1) available and (2) evaluated regularly by the Chief Operating Decision Maker (CODM) in deciding how to allocate resources and in assessing performance. Synopsys’ CODMs are the Company’s Chief Executive Officer and Chief Operating Officer.

 

The Company provides software and hardware products and consulting services in the electronic design automation software industry. The Company operates in a single segment. In making operating decisions, the CODMs primarily consider consolidated financial information, accompanied by disaggregated information about revenues by geographic region. Specifically, the CODMs consider where individual “seats” or licenses to the Company’s products are used in allocating revenue to particular geographic areas. Revenue is defined as revenues from external customers. Goodwill is not allocated since the Company operates in one reportable operating segment.

 

The following table presents the revenues related to operations by geographic areas:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

United States

 

$

160,601

 

$

160,330

 

$

326,058

 

$

321,040

 

Europe

 

51,351

 

48,750

 

100,436

 

98,045

 

Japan

 

67,231

 

60,052

 

137,178

 

112,525

 

Asia-Pacific and other

 

57,652

 

55,421

 

112,918

 

108,408

 

Consolidated

 

$

336,835

 

$

324,553

 

$

676,590

 

$

640,018

 

 

Geographic revenue data for multi-region, multi-product transactions reflect internal allocations and is therefore subject to certain assumptions and to the Company’s methodology.

 

One customer accounted for more than ten percent of the Company’s consolidated revenue in the three and six months ended April 30, 2009 and 2008.

 

Note 13.   Other Income, net

 

The following table presents the components of other income, net:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in thousands)

 

Interest income

 

$

2,782

 

$

5,268

 

$

6,425

 

$

12,284

 

Gain (loss) on assets related to executive deferred compensation plan assets

 

3,499

 

(5,010

)

(519

)

(5,503

)

Foreign currency exchange gain (loss)

 

2,311

 

(81

)

5,712

 

714

 

Other, net

 

1,853

 

(26

)

926

 

(1,014

)

Total

 

$

10,445

 

$

151

 

$

12,544

 

$

6,481

 

 

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Note 14.   Taxes

 

The Company estimates its annual effective tax rate at the end of each fiscal quarter. The Company’s estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and the Company’s interpretations of tax laws and possible outcomes of audits.

 

The following table presents the provision for income taxes and the effective tax rates for the three and six months ended April 30, 2009 and 2008:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

65,113

 

$

50,088

 

$

134,784

 

$

110,257

 

Provision for income tax

 

$

16,825

 

$

10,701

 

$

34,067

 

$

24,425

 

Effective tax rate

 

26

%

21

%

25

%

22

%

 

The Company’s effective tax rate for the three and six months ended April 30, 2009 is lower than the statutory federal income tax rate of 35% primarily due to the tax impact of non-U.S. operations, which are taxed at lower rates, and research and development credits, partially offset by state taxes and non-deductible share-based compensation recorded under SFAS 123(R). The effective tax rate increased in the three and six months ended April 30, 2009, as compared to the same periods in fiscal 2008, primarily due to a decrease in tax exempt investment income and changes in mix of geographical earnings.

 

The timing of the resolution of income tax examinations is highly uncertain as well as the amounts and timing of various tax payments that are part of the settlement process. This could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that in the next twelve months it is reasonably possible that the statute of limitations will expire on income and withholding tax filings in various jurisdictions, and that certain federal and foreign transfer pricing issues could be effectively settled. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $76 million, of which approximately $50 million would decrease goodwill as a result of the settlement of the IRS examination for fiscal 2002 through 2004. See IRS Examinations below for the status of current federal income tax audits.

 

On February 17, 2009, the President of the United States signed into law the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”), which has significant tax implications for certain businesses and individuals.  The Company has not yet fully analyzed all provisions of the Recovery Act but does not anticipate it having a material impact on its effective tax rate for fiscal 2009.

 

On May 27, 2009, the 9th Circuit Court of Appeals issued its ruling in the case of Xilinx, Inc. v. Commissioner, holding that stock based compensation was required to be included in certain transfer pricing arrangements between a U.S. company and its offshore subsidiary.  As a result of the ruling in this case, the Company expects to increase its liability for unrecognized tax benefits and decrease shareholders’ equity by approximately $8 to $10 million mostly in the third quarter of 2009.

 

IRS Examinations

 

The Company is regularly audited by the IRS.

 

On June 30, 2008, the Appeals Office of the IRS and the Company executed a final Closing Agreement with respect to a Revenue Agent’s Report (RAR) received for the audit of fiscal years 2000 and 2001, in connection with a transfer pricing dispute.  As a result of the Closing Agreement and the Company’s concurrent evaluation of its ability to use certain foreign tax credits, the Company’s provision for income taxes in its third fiscal quarter of 2008 included a net income tax benefit (net of decreases in related deferred tax assets) of $17.3 million.

 

In July 2008, the IRS completed its field examination of fiscal years 2002-2004 and issued an RAR in which the IRS proposed an adjustment that would result in an aggregate tax deficiency for the three year period of approximately $236.2 million, $130.5 million of which would be a reduction of certain tax losses and credits that would otherwise be available either as refund claims or to offset taxes due in future periods. The IRS is contesting the Company’s tax deduction for payments made in connection with litigation between Avant! Corporation and Cadence Design Systems, Inc.  In addition, the IRS has asserted that the Company is required to make an additional transfer pricing adjustment with a wholly owned non-U.S. subsidiary as a result of the Company’s acquisition of Avant! in 2002. The IRS also proposed adjustments to the Company’s transfer pricing arrangements with its foreign subsidiaries, deductions for foreign trade income and certain temporary differences. The Company has agreed to additional taxes of approximately

 

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$20.0 million for these proposed adjustments, which have been fully provided for in prior years. The total adjustments proposed by the IRS, if sustained, would also result in additional state taxes (net of the federal tax benefit for state taxes paid) of approximately $17 million.  On August 9, 2008, the Company timely filed a protest with the IRS.

 

In the second quarter of fiscal 2009, the Company reached a tentative settlement with the Examination Division of the IRS that would resolve this matter. The settlement is subject to further review and approval within the federal government, including the Joint Committee on Taxation of the U.S. Congress (“Joint Committee”), which could take at least several more months, but the Company believes that settlement is likely. If the settlement becomes final on the tentative terms agreed upon, the Company has already adequately provided for this matter. As a result of the settlement, the Company would owe additional taxes of approximately $53 million (including interest) which would likely be payable within the next 12 months and would be fully offset by future tax benefits over the next 8 years. Upon Joint Committee approval, certain refund claims of approximately $35 million (including interest) would be disbursed to the Company as a result of the settlement. The net impact of the tentative settlement on the Company’s tax expense is not expected to be material. Final resolution of this matter could take considerable time or may not be finally approved by the federal government, in which case, while the Company believes it is still adequately provided for regarding this matter, there is still a possibility that an adverse outcome of the matter could have a material effect on the Company’s results of operations and financial condition.

 

Note 15.   Contingencies

 

See Note 14 above regarding the IRS Examinations.

 

Other Proceedings

 

The Company is also subject to other routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of its business. The ultimate outcome of any litigation is uncertain and unfavorable outcomes could have a negative impact on the Company’s financial position and results of operations.

 

Note 16.   Effect of New Accounting Pronouncements

 

In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (SFAS 165).  SFAS 165 intends to establish general standards of accounting for and disclosures of subsequent events that occurred after the balance sheet date but prior to the issuance of financial statements.  SFAS 165 is effective for financial statements issued for interim or fiscal years ending after June 15, 2009.  The requirements of SFAS 165 will be effective for the Company in the third fiscal quarter of fiscal 2009.  The adoption of SFAS 165 will not have significant impacts on its consolidated financial position, results of operations or cash flows.

 

With the exception of the discussion above, the effect of recent accounting pronouncements has not changed from the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2008.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q, and in particular the following discussion, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). These statements include but are not limited to statements concerning: our business, product and platform strategies, expectations regarding previous and future acquisitions; completion of development of our unfinished products, or further development or integration of our existing products; continuation of current industry trends towards vendor consolidation; expectations regarding our license mix; expectations regarding customer interest in more highly integrated tools and design flows; expectations of the success of our intellectual property and design for manufacturing initiatives; expectations concerning recent completed acquisitions; expectations regarding the likely outcome of the Internal Revenue Service’s proposed net tax deficiencies for fiscal years 2000 through 2004 and other outstanding litigation; expectations that our cash, cash equivalents and short-term investments and cash generated from operations will satisfy our business requirements for the next 12 months; and our expectations of our future liquidity requirements. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including, without limitation, those identified below in Part II, Item 1A of this Form 10-Q. The words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “continue,” or the negatives of these terms, or other comparable terminology and similar expressions identify these forward-looking statements. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.  The information included herein is given as of the filing date of this Form 10-Q with the Securities and Exchange Commission (SEC) and future events or circumstances could differ significantly from these forward-looking statements. Accordingly, we caution readers not to place undue reliance on these statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements.  All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Readers are urged to carefully review and consider the various disclosures made in this report and in other documents we file from time to time with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

 

The following summary of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this report and with our audited consolidated financial statements and the related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008, filed with the SEC on December 22, 2008.

 

Fiscal Year End.  Our fiscal year ends on the Saturday nearest to October 31. Our second fiscal quarter ended on May 2, 2009.  Fiscal 2009 and 2008 are both 52-week fiscal years. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the applicable calendar month end.

 

Overview

 

Business Summary

 

We are a world leader in electronic design automation (EDA) software and related services for semiconductor design companies. We offer a broad portfolio of solutions that are highly integrated to solve our customers’ needs at each stage of the semiconductor chip design process. We deliver technology-leading semiconductor design and verification software platforms and integrated circuit (IC) manufacturing software products to the global electronics market, enabling the development and production of complex systems-on-chips (SoCs). In addition, we provide intellectual property (IP), system-level design hardware and software products, and design services to simplify the design process and accelerate time-to-market for our customers. Finally, we provide software and services that help customers prepare and optimize their designs for manufacturing.

 

We generate a substantial majority of our revenue from large customers in the semiconductor and electronics industries. Our customers typically fund purchases of our software and services largely out of their research and development (R&D) budgets and, to a lesser extent, their manufacturing and capital budgets. Our customers continually face the competing challenges of developing increasingly advanced electronics products while reducing their design and manufacturing costs in order to meet ongoing consumer demand for lower prices. Our customers’ business outlook and willingness to invest in new and increasingly complex chip designs affect their spending decisions and vendor selections. The current crisis in the financial markets and the ongoing weakness of the global economy have exacerbated these challenges.

 

Our customers bargain on various aspects of the contractual arrangements they make with us. Our customers often demand a broader portfolio of solutions, support and services and seek more favorable terms such as expanded license usage, future purchase rights and other unique rights at an overall lower total cost of design. Our customer arrangements are complex, involving hundreds of products and various license rights. No one factor drives our customers’ buying decisions and we compete on all fronts to capture a higher portion of our customers’ budgets in a highly competitive EDA market. Customers generally negotiate the total value of the

 

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arrangement rather than just unit pricing or volumes. Collectively, the increase in the value of all of our customer contracts is the primary driver of our overall growth in revenue over time. As further described below, the effect of an increase in value for a particular customer is typically recognized over the life of the customer contract rather than in one particular period.

 

Our business model allows a substantial majority of our customers to pay for licenses over a period of time and generates recurring revenue for us over a period of time, generally three years. We continue to target achieving greater than 90% of our total revenue as recurring revenue, which we refer to in our financial statements as time-based license and maintenance and service revenue.  Accordingly, most of the revenue we recognize in any particular quarter results from our selling efforts in each of the prior periods during the last three or so years rather than from efforts or changes in the current period.  The timing of orders is less important to us in the short term and we have historically been able to resist typical software industry quarter-end pressures and minimize the closing of contracts with terms, including pricing terms, which may be less favorable to us.

 

Short-term fluctuations in industry or general economic conditions or in orders generally do not immediately affect our financial results due to our business model. While the electronics, semiconductor and EDA industries are currently experiencing severe uncertainty and weakness due to the downturn in the global economy, to date our business model has substantially protected our financial results.

 

Nevertheless, our business model and longer-term financial results are not immune from sustained economic downturns. The turmoil and uncertainty caused by current economic conditions have caused some of our customers to postpone their decision-making, decrease their spending and/or delay their payments to us. We experienced a slight decrease in the committed average annual revenue from customers that renewed their contracts with us during the second quarter of fiscal 2009 and we currently expect such committed average annual revenue to also be down slightly at the end of fiscal 2009 compared to the end of fiscal 2008. Continued periods of decreased committed average annual revenue, additional customer bankruptcies, or consolidation among our customers, could adversely affect our year-over-year revenue growth and could decrease our backlog. The economic downturn has also negatively affected several of our principal competitors, and a few have recently announced lower revenues than they had previously expected. We will continue to monitor market conditions and may make adjustments to our business in order to reduce the adverse impact that the prolonged economic downturn could have on our business. We believe that the combination of our solid financials, leading technology and strong customer relationships will help us implement our strategies successfully.

 

Financial Performance Summary for the Three Months Ended April 30, 2009

 

·                  Total revenue of $336.8 million was up 4% from $324.6 million in the same quarter in fiscal 2008. The increase was primarily attributable to revenue recognized from term licenses booked in prior periods which were recognized as time-based licenses under our accounting policy, as well as the impact of Synplicity sales from our acquisition in May 2008.

 

·                  Time-based license revenue of $284.0 million was up 2% from $278.2 million in the same quarter in fiscal 2008. The increase was primarily attributable to revenue recognized from term licenses booked in prior periods which were recognized as time-based licenses in the current quarter.

 

·                  Upfront license revenue of $16.0 million was up 31% from $12.2 million in the same quarter in fiscal 2008. The increase reflected the impact of Synplicity product sales.

 

·                  We derived approximately 95% of our total revenue from time-based, maintenance and services revenues, and 5% from upfront revenue, compared to approximately 96% and 4%, respectively, in the same quarter in fiscal 2008. This reflects our adherence to our current business model.

 

·                  Maintenance revenue of $21.6 million was up 38% from $15.7 million in the same quarter in fiscal 2008. The increase was primarily attributable to the maintenance contracts associated with the impact of Synplicity product sales.  Professional services and other revenue of $15.2 million were down 17% from $18.4 million in the same quarter in fiscal 2008. The decrease was primarily driven by the decrease in customer demand as a result of the economic downturn and the timing of customer acceptance of services performed under ongoing contracts.

 

·                  Net income of $48.3 million was up 23% from $39.4 million in the same quarter in fiscal 2008. The increase was primarily due to slight increases in revenues and cost control efforts.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial results under the heading Result of Operations below are based on our unaudited condensed consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. In preparing these financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses and net income. On an on-going basis, we evaluate our estimates based on

 

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historical experience and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates.

 

We describe our revenue recognition and income taxes policies below. Our remaining critical accounting policies and estimates are discussed in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended October 31, 2008, filed with the SEC on December 22, 2008.

 

Revenue Recognition

 

We recognize revenue from software licenses and related maintenance and service revenue and, to a lesser extent, from hardware sales. Software license revenue consists of fees associated with the licensing of our software. Maintenance and service revenue consists of maintenance fees associated with perpetual and term licenses and professional service fees.

 

We have designed and implemented revenue recognition policies in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended, and EITF 00-21, Revenue Arrangements with Multiple Deliverables.

 

With respect to software licenses, we utilize three license types:

 

·                  Technology Subscription Licenses (TSLs) are time-based licenses for a finite term, and generally provide the customer limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. We bundle and do not charge separately for post-contract customer support (maintenance) for the term of the license.

 

·                  Term Licenses are also for a finite term, but do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually for the balance of the term. The annual maintenance fee is typically calculated as a percentage of the net license fee.

 

·                  Perpetual Licenses continue as long as the customer renews maintenance plus an additional 20 years. Perpetual licenses do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually.

 

For the three software license types, we recognize revenue as follows:

 

·                  TSLs.  We typically recognize revenue from TSL fees (which include bundled maintenance) ratably over the term of the license period, or as customer installments become due and payable, whichever is later. Revenue attributable to TSLs is reported as “time-based license revenue” in the unaudited condensed consolidated statement of operations.

 

·                  Term Licenses.  We recognize revenue from term licenses in full upon shipment of the software if payment terms require the customer to pay at least 75% of the license fee within one year from shipment and all other revenue recognition criteria are met. Revenue attributable to these term licenses is reported as “upfront license revenue” in the unaudited condensed consolidated statement of operations. For term licenses in which less than 75% of the license fee is due within one year from shipment, we recognize revenue as customer installments become due and payable. Such revenue is reported as “time-based license revenue” in the unaudited condensed consolidated statement of operations.

 

·                  Perpetual Licenses. We recognize revenue from perpetual licenses in full upon shipment of the software if payment terms require the customer to pay at least 75% of the license fee within one year from shipment and all other revenue recognition criteria are met. Revenue attributable to these perpetual licenses is reported as “upfront license revenue” in the unaudited condensed consolidated statement of operations. For perpetual licenses in which less than 75% of the license fee is payable within one year from shipment, we recognize the revenue as customer installments become due and payable. Revenue attributable to these perpetual licenses is reported as “time-based license revenue” in the unaudited condensed consolidated statement of operations.

 

We generally recognize revenue from hardware sales in full upon shipment if all other revenue recognition criteria are met. Revenue attributable to these hardware sales is reported as “upfront license revenue” in the unaudited condensed consolidated statement of operations. If a technology subscription license is sold together with the hardware, we recognize revenue ratably over the term of the software license period, or as customer installments become due and payable, whichever is later.

 

In addition, we recognize revenue from maintenance fees ratably over the maintenance period to the extent cash has been received or fees become due and payable, and recognize revenue from professional service and training fees as such services are performed and accepted by the customer. Revenue attributable to maintenance, professional services and training is reported as “maintenance and service revenue” in the unaudited condensed consolidated statement of operations.

 

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Our determination of fair value of each element in multiple element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE of fair value for each element to the price charged when such element is sold separately.

 

We have analyzed all of the elements included in our multiple-element software arrangements and have determined that we have sufficient VSOE to allocate revenue to the maintenance components of our perpetual and term license products and to professional services. Accordingly, assuming all other revenue recognition criteria are met, we recognize license revenue from perpetual and term licenses upon delivery using the residual method, we recognize revenue from maintenance ratably over the maintenance term, and we recognize revenue from professional services as milestones are performed and accepted. We recognize revenue from TSLs ratably over the term of the license, assuming all other revenue recognition criteria are met, since there is not sufficient VSOE to allocate the TSL fee between license and maintenance services.

 

We make significant judgments related to revenue recognition. Specifically, in connection with each transaction involving our products, we must evaluate whether: (1) persuasive evidence of an arrangement exists, (2) delivery of software or services has occurred, (3) the fee for such software or services is fixed or determinable, and (4) collectability of the full license or service fee is probable. All four of these criteria must be met in order for us to recognize revenue with respect to a particular arrangement. We apply these revenue recognition criteria as follows:

 

·                 Persuasive Evidence of an Arrangement Exists. Prior to recognizing revenue on an arrangement, our customary policy is to have a written contract, signed by both the customer and us or a purchase order from those customers that have previously negotiated a standard end-user license arrangement or purchase agreement.

 

·                 Delivery Has Occurred. We deliver our products to our customers electronically or physically. For electronic deliveries, delivery occurs when we provide access to our customers to take immediate possession of the software by downloading it to the customer’s hardware. For physical deliveries, the standard transfer terms are typically FOB shipping point. We generally ship our products or license keys promptly after acceptance of customer orders. However, a number of factors can affect the timing of product shipments and, as a result, timing of revenue recognition, including the delivery dates requested by customers and our operational capacity to fulfill product orders at the end of a quarter.

 

·                 The Fee is Fixed or Determinable. Our determination that an arrangement fee is fixed or determinable depends principally on the arrangement’s payment terms. Our standard payment terms for perpetual and term licenses require 75% or more of the license fee to be paid within one year. If the arrangement includes these terms, we regard the fee as fixed or determinable, and recognize all license revenue under the arrangement in full upon delivery (assuming all other revenue recognition criteria are met). If the arrangement does not include these terms, we do not consider the fee to be fixed or determinable and generally recognize revenue when customer installments are due and payable. In the case of a TSL, because of the right to exchange products or receive unspecified future technology and because VSOE for maintenance services does not exist for a TSL, we recognize revenue ratably over the term of the license, but not in advance of when customers’ installments become due and payable, even if the fee is otherwise fixed or determinable.

 

·                 Collectability is Probable. We judge collectability of the arrangement fees on a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers with whom we have a history of successful collection. For a new customer, or when an existing customer substantially expands its commitments to us, we evaluate the customer’s financial position and ability to pay and typically assign a credit limit based on that review. We increase the credit limit only after we have established a successful collection history with the customer. If we determine at any time that collectability is not probable under a particular arrangement based upon our credit review process or the customer’s payment history, we recognize revenue under that arrangement as customer payments are actually received.

 

Income Taxes

 

We calculate our current and deferred tax provisions in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Our estimates and assumptions used in such provisions may differ from the actual results as reflected in our income tax returns and we record the required adjustments when they are identified and resolved.

 

We recognize deferred tax assets and liabilities for the temporary differences between the book and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction by jurisdiction basis, as

 

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well as feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. We believe that the net deferred tax assets of approximately $290 million that are recorded on our balance sheet will ultimately be realized. However, if we determine in the future that it is more likely than not we will not be able to realize a portion or the full amount of deferred tax assets, we would record an adjustment to the deferred tax asset valuation allowance as a charge to earnings in the period such determination is made.

 

Included in our net deferred tax assets as of October 31, 2008 are federal foreign tax credits of $70.1 million of which $63.9 million will expire from fiscal 2013 through 2018.  The remaining $6.2 million in foreign tax credits are from acquired companies, which have a valuation allowance of $3.4 million, and will expire between fiscal 2009 and 2017. Foreign tax credits can only be carried forward ten years, unlike net operating loss and federal research credit carryforwards that have a twenty year carryforward period, and may only be used after foreign tax credits arising in each subsequent year have been used first. Our ability to utilize foreign tax credits is dependent upon having sufficient foreign source income during the carryforward period. We have recorded a valuation allowance of $19.7 million with respect to our foreign tax credit carryforward, of which $14.6 million was recorded as a result of the 2000-2001 final IRS settlement. See Note 14 of Notes to Unaudited Condensed Consolidated Financial Statements. The need for a valuation allowance with respect to foreign tax credits is subject to change based upon a number of factors, including the amount of foreign tax credits arising in future years, our forecasts of future foreign source income, the amount of our undistributed earnings of our foreign subsidiaries, the outcome of tax audit settlements and changes in income tax laws that may affect our ability to use such credits.

 

The calculation of tax liabilities involves the inherent uncertainty associated with the application of complex tax laws. We are also subject to examination by various taxing authorities. We believe we have adequately provided in our financial statements for potential additional taxes. If we ultimately determine that these amounts are not owed, we would reverse the liability and recognize the tax benefit in the period in which we determine that the liability is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, we would record an additional charge to earnings. See Note 14 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of taxes and the Revenue Agent’s Reports from the IRS we received in June 2005 and July 2008 asserting very large net increases to our U.S. tax arising from the audit of fiscal 2000 through 2001 and fiscal 2002 through 2004, respectively.

 

Results of Operations

 

Revenue Background

 

We generate our revenue from the sale of software licenses, hardware products, maintenance and professional services. Under current accounting rules and policies, we recognize revenue from orders we receive for software licenses, hardware products and services at varying times. In most instances, we recognize revenue on a TSL software license order over the license term and on a term or perpetual software license order in the quarter in which the license is shipped. Substantially all of our current time-based licenses are TSLs with an average license term of approximately three years. Maintenance orders normally bring in revenue ratably over the maintenance period (normally one year). Professional service orders generally turn into revenue upon completion and customer acceptance of contractually agreed milestones.  A more complete description of our revenue recognition policy can be found above under Critical Accounting Policies and Estimates.

 

Our revenue in any fiscal quarter is equal to the sum of our time-based license, upfront license, maintenance and professional service revenue for the period. We derive time-based license revenue in any quarter largely from TSL orders received and delivered in prior quarters. We derive upfront license revenue directly from term and perpetual license and product hardware orders mostly booked and shipped during the quarter. We derive maintenance revenue in any quarter largely from maintenance orders received in prior quarters since our maintenance orders generally yield revenue ratably over a term of one year. We also derive professional service revenue primarily from orders received in prior quarters, since we recognize revenue from professional services when those services are delivered and accepted, not when they are booked.

 

Our license revenue is sensitive to the mix of TSLs and perpetual or term licenses delivered during a reporting period. A TSL order typically yields lower current quarter revenue but contributes to revenue in future periods. For example, a $120,000 order for a three-year TSL shipped on the last day of a quarter typically generates no revenue in that quarter, but $10,000 in each of the twelve succeeding quarters. Conversely, perpetual licenses and term licenses with greater than 75% of the license fee due within one year from shipment typically generate current quarter revenue but no future revenue (e.g., a $120,000 order for a perpetual license generates $120,000 in revenue in the quarter the product is shipped, but no future revenue).

 

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Total Revenue

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

$

336.8

 

$

324.6

 

$

12.2

 

4

%

Six months ended

 

$

676.6

 

$

640.0

 

$

36.6

 

6

%

 

The increases in total revenue for the three and six months ended April 30, 2009 compared to the same periods in fiscal 2008 were primarily due to revenue recognized from term licenses booked in prior quarters which were recognized as time-based licenses under our accounting policy as well as the impact of Synplicity sales from our acquisition in May 2008.  The increases were partially offset by the decrease in professional services revenue of $6.2 million.

 

While the electronics, semiconductor and EDA industries are currently experiencing severe uncertainty and weakness due to the recent downturn in the global economy, to date, our business model has substantially protected our financial results and enabled us to achieve revenue growth compared to the same periods in the previous year. Nevertheless, our business model and longer-term financial results are not immune from sustained economic downturns. The turmoil and uncertainty caused by current economic conditions have caused some of our customers to postpone their decision-making, decrease their spending and/or delay their payments to us. We experienced a slight decrease in the committed average annual revenue from customers that renewed their contracts with us during the second quarter of fiscal 2009 and we currently expect such committed average annual revenue to also be down slightly at the end of fiscal 2009 compared to the end of fiscal 2008. Continued periods of decreased committed average annual revenue, additional customer bankruptcies, or consolidation among our customers, could adversely affect our year-over-year revenue growth and could decrease our backlog.

 

Time-Based License Revenue

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

$

284.0

 

$

278.2

 

$

5.8

 

2

%

Percentage of total revenue

 

84

%

86

%

 

 

 

 

Six months ended

 

$

569.0

 

$

546.1

 

$

22.9

 

4

%

Percentage of total revenue

 

84

%

85

%

 

 

 

 

 

The increases in time-based license revenue for the three and six months ended April 30, 2009 compared to the same periods in fiscal 2008 was primarily due to revenue recognized from term licenses booked in prior periods which were recognized as time-based licenses.

 

Upfront License Revenue

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

$

16.0

 

$

12.2

 

$

3.8

 

31

%

Percentage of total revenue

 

5

%

4

%

 

 

 

 

Six months ended

 

$

34.3

 

$

24.7

 

$

9.6

 

39

%

Percentage of total revenue

 

5

%

4

%

 

 

 

 

 

Upfront license revenue increased for the three and six months ended April 30, 2009 compared to the same periods in fiscal 2008, primarily due to Synplicity related product sales from our acquisition in May 2008. The increases were also attributable to normal fluctuations in customer license requirements which can drive the amount of upfront orders and revenue in any particular quarter.

 

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Maintenance and Services Revenue

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

 

 

 

 

 

 

 

 

Maintenance revenue

 

$

21.6

 

$

15.7

 

$

5.9

 

38

%

Professional services and other revenue

 

15.2

 

18.4

 

(3.2

)

(17

)%

Total maintenance and services revenue

 

$

36.8

 

$

34.1

 

$

2.7

 

8

%

Percentage of total revenue

 

11

%

11

%

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Maintenance revenue

 

$

42.3

 

$

32.1

 

$

10.2

 

32

%

Professional services and other revenue

 

30.9

 

37.1

 

(6.2

)

(17

)%

Total maintenance and services revenue

 

$

73.2

 

$

69.2

 

$

4.0

 

6

%

Percentage of total revenue

 

11

%

11

%

 

 

 

 

 

Maintenance revenue increased for the three and six months ended April 30, 2009 compared with the same periods in fiscal 2008, primarily due to the maintenance revenue stream from perpetual-based products that we acquired in our acquisition of Synplicity that was completed in May 2008. We expect our fiscal 2009 to similarly reflect the impact of the Synplicity acquisition on a year-over-year comparative basis, but do not expect the acquisition-related increases to continue thereafter.  In addition, some customers may in the future choose not to renew maintenance on upfront licenses for economic or other factors, which would lower our future maintenance revenue.

 

Professional services and other revenue decreased for the three and six months ended April 30, 2009 compared with the same periods in fiscal 2008 due to the decrease in customer demand as a result of the economic downturn and the timing of customer acceptance of services performed under ongoing contracts.

 

Events Affecting Cost of Revenues and Operating Expenses

 

Functional Allocation of Operating Expenses. We allocate certain human resource programs, information technology and facility expenses among our functional income statement categories based on headcount within each functional area. Annually, or upon a significant change in headcount (such as a workforce reduction, realignment or acquisition) or other factors, management reviews the allocation methodology and expenses included in the allocation pool.

 

Cost of Revenue

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

 

 

 

 

 

 

 

 

Cost of license revenue

 

$

42.3

 

$

41.7

 

$

0.6

 

1

%

Cost of maintenance and service revenue

 

15.0

 

16.2

 

(1.2

)

(7

)%

Amortization of intangible assets

 

7.7

 

5.8

 

1.9

 

32

%

Total

 

$

65.0

 

$

63.7

 

$

1.3

 

2

%

Percentage of total revenue

 

19

%

20

%

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Cost of license revenue

 

$

84.1

 

$

82.1

 

$

2.0

 

2

%

Cost of maintenance and service revenue

 

30.6

 

32.1

 

(1.5

)

(5

)%

Amortization of intangible assets

 

15.7

 

10.8

 

4.9

 

45

%

Total

 

$

130.4

 

$

125.0

 

$

5.4

 

4

%

Percentage of total revenue

 

19

%

20

%

 

 

 

 

 

We divide cost of revenue into three categories: cost of license revenue, cost of maintenance and service revenue, and amortization of intangible assets. We segregate expenses directly associated with providing consulting and training from cost of license revenue associated with internal functions providing license delivery and post-customer contract support services. We then allocate these group costs between cost of license revenue and cost of maintenance and service revenue based on license and service revenue reported.

 

Cost of license revenue.  Cost of license revenue includes costs related to products sold and software licensed, allocated operating costs related to product support and distributions costs, royalties paid to third party vendors, and the amortization of capitalized research and development costs associated with software products which have reached technological feasibility.

 

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Cost of maintenance and service revenue.  Cost of maintenance and service revenue includes operating costs associated to maintain the infrastructure necessary to operate our services and training organization, and costs associated with the delivery of our consulting services, such as, hotline and on-site support, production services and documentation of maintenance updates.

 

Amortization of intangible assets.  Amortization of intangible assets, which is amortized to cost of revenue and operating expenses, includes the amortization of the contract rights associated with certain executory contracts and the amortization of core/developed technology, trademarks, trade names, customer relationships, covenants not to compete and other intangibles related to acquisitions.

 

Cost of revenue increased slightly by $1.3 million for the three months ended April 30, 2009 compared with the same period in fiscal 2008.  The increase was primarily due to an increase of $2.1 million in personnel costs and an increase of $1.9 million in amortization of intangible assets, as a result of prior acquisitions. The increases were partially offset by decrease in travel and functionally allocated expenses as a result of expense control efforts in fiscal 2009.

 

The increase in cost of revenue of $5.4 million for the six months ended April 30, 2009 compared with the same period in fiscal 2008 was primarily due to an increase of $4.3 million in personnel related costs and an increase of $4.9 million in amortization of intangible assets, as a result of prior acquisitions. The increases were partially offset by lower travel, consulting and functionally allocated expenses as a result of expense control efforts in fiscal 2009.

 

Operating Expenses

 

Research and Development

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

$

103.0

 

$

95.3

 

$

7.7

 

8

%

Percentage of total revenue

 

31

%

29

%

 

 

 

 

Six months ended

 

$

200.8

 

$

187.8

 

$

13.0

 

7

%

Percentage of total revenue

 

30

%

29

%

 

 

 

 

 

The increase in research and development expense for the three months ended April 30, 2009 compared with the same period in fiscal 2008 was primarily due to an increase of $7.0 million in personnel related costs which included the increase of $4.6 million in the fair value of our deferred compensation plan obligation, and an increase of $1.4 million in functionally allocated expenses, reflecting headcount increases as a result of prior acquisitions. The increase was partially offset by $1.1 million decline in depreciation expense.

 

The increase in research and development expense for the six months ended April 30, 2009 compared with the same period in fiscal 2008 was primarily due to an increase of $10.7 million in employee personnel related costs which included the increase of $2.9 million in the fair value of our deferred compensation plan obligation and an increase of $3.6 million in functionally allocated expenses, reflecting headcount increases as a result of prior acquisitions.  The increase was partially offset by $2.4 million decrease in depreciation expense.

 

Sales and Marketing

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

$

82.5

 

$

82.9

 

$

(0.4

)

<(1

)%

Percentage of total revenue

 

24

%

26

%

 

 

 

 

Six months ended

 

$

159.9

 

$

160.3

 

$

(0.4

)

<(1

)%

Percentage of total revenue

 

24

%

25

%

 

 

 

 

 

Sales and marketing expenses were relatively flat for the three and six months ended April 30, 2009 compared with the same periods in fiscal 2008.

 

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General and Administrative

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

$

28.7

 

$

26.2

 

$

2.5

 

10

%

Percentage of total revenue

 

9

%

8

%

 

 

 

 

Six months ended

 

$

55.9

 

$

50.0

 

$

5.9

 

12

%

Percentage of total revenue

 

8

%

8

%

 

 

 

 

 

The increase in general and administrative expenses for the three months ended April 30, 2009 compared with the same period in fiscal 2008 was primarily due to an increase of $1.2 million in personnel related costs and an increase of $1.0 million in charitable contributions.

 

The increase in general and administrative expenses for the six months ended April 30, 2009 compared with the same period in fiscal 2008 was primarily due to an increase of $1.5 million in facilities related costs, $1.2 million in personnel related costs, $1.5 million in charitable contributions, and $2.3 million in bad debt reserve based on our review of customer receivables.

 

Amortization of Intangible Assets

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

 

 

 

 

 

 

 

 

Included in cost of revenue

 

$

7.7

 

$

5.8

 

$

1.9

 

33

%

Included in operating expenses

 

2.9

 

6.6

 

(3.7

)

(56

)%

Total

 

$

10.6

 

$

12.4

 

$

(1.8

)

(15

)%

Percentage of total revenue

 

3

%

4

%

 

 

 

 

Six months ended

 

 

 

 

 

 

 

 

 

Included in cost of revenue

 

$

15.7

 

$

10.8

 

$

4.9

 

45

%

Included in operating expenses

 

6.7

 

13.2

 

(6.5

)

(49

)%

Total

 

$

22.4

 

$

24.0

 

$

(1.6

)

(7

)%

Percentage of total revenue

 

3

%

4

%

 

 

 

 

 

The decrease in amortization of intangible assets for three and six months ended April 30, 2009 is primarily due to certain intangible assets acquired in prior years becoming fully amortized offset by amortization of intangible assets from our Synplicity acquisition which occurred in May of fiscal 2008 and our recent acquisition in the first quarter of fiscal 2009. See Note 5 to Notes to Unaudited Condensed Consolidated Financial Statements for a schedule of future amortization amounts.

 

In-Process Research and Development

 

In-process research and development (IPRD) expense is composed of in-process technologies of $0.6 million associated with an acquisition of assets of a business completed during the first quarter of fiscal 2009. At the date of the acquisition, the project associated with the IPRD efforts had not yet reached technological feasibility and the research and development in process had no alternative future uses and therefore the amount was charged to expense.

 

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Table of Contents

 

Other Income, net

 

 

 

April 30,

 

Dollar

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

 

 

(dollars in millions)

 

Three months ended

 

 

 

 

 

 

 

 

 

Interest income

 

$

2.8

 

$

5.3

 

$

(2.5

)

(47

)%

Gain (loss) on assets related to executive deferred compensation plan assets

 

3.5

 

(5.0

)

8.5

 

170

%

Foreign currency exchange gain (loss)

 

2.3

 

(0.1

)

2.4

 

2400

%

Other, net

 

1.8

 

 

1.8

 

100

%

Total

 

$

10.4

 

$

0.2

 

$

10.2

 

5100

%

Six months ended

 

 

 

 

 

 

 

 

 

Interest income

 

$

6.4

 

$

12.3

 

$

(5.9

)

(48

)%

Loss on assets related to executive deferred compensation plan assets

 

(0.5

)

(5.5

)

5.0

 

91

%

Foreign currency exchange gain

 

5.7

 

0.7

 

5.0

 

714

%

Other, net

 

0.9

 

(1.0

)

1.9

 

190

%

Total

 

$

12.5

 

$

6.5

 

$

6.0

 

92

%

 

Other income, net, increased during the three and six months ended April 30, 2009, compared to the same period in fiscal 2008 primarily due to the fair market value fluctuations of investments in our deferred compensation plan, and foreign currency exchange gain. These increases were partially offset by a decrease in interest income due to lower interest rates.

 

Effect of foreign currency fluctuations

 

The overall goal of our comprehensive hedging activities is to minimize the impact of currency fluctuations on our net income over our fiscal year. The success of our hedging activities depends upon the accuracy of our estimates of various balances and transactions denominated in non-functional currencies. To the extent our estimates are correct, gains and losses on our foreign currency contracts will be offset by corresponding losses and gains on the underlying transactions.

 

Foreign currency fluctuations, net of hedging, did not have a significant impact to expenses for the three and six months ended April 30, 2009.

 

Taxes

 

See Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements.

 

Liquidity and Capital Resources

 

Our sources of cash, cash equivalents and short-term investments are funds generated from our business operations, issuances of common stock upon stock option exercises or employee stock purchases and funds that may be drawn down under our credit facility.

 

The following sections discuss changes in our balance sheet and cash flows, and other commitments on our liquidity and capital resources.

 

Cash and Cash Equivalents and Short-Term Investments

 

 

 

April 30,

 

October 31,

 

 

 

 

 

 

 

2009

 

2008

 

$ Change

 

% Change

 

 

 

(dollars in millions)

 

Cash and cash equivalents

 

$

506.4

 

$

577.6

 

$

(71.2

)

(12

)%

Short-term investments

 

370.4

 

373.7

 

(3.3

)

<(1

)%

Total

 

$

876.8

 

$

951.3

 

$

(74.5

)

(8

)%

 

During the six months ended April 30, 2009, our primary sources and uses of cash consisted of (1) cash used in operating activities of $57.2 million, (2) proceeds from sales and maturities of short-term investments of $123.0 million, (3) proceeds from issuances of common stock of $26.7 million, (4) purchases of investments of $119.2 million, and (5) cash paid for acquisitions of $27.3 million.

 

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