Edgar Filing: SYNOPSYS INC

Large accelerated filer

Accelerated Filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)



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

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2015



¨	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)

690 EAST MIDDLEFIELD ROAD

MOUNTAIN VIEW, CA 94043

(Address of principal executive offices, including zip code)

(650) 584-5000

(Registrant’s telephone number, including area code)

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 ý No ¨

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 ý No ¨

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.

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

As of August 20, 2015, there were 155,947,407 shares of the registrant’s common stock outstanding.

Table of Contents

SYNOPSYS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED JULY 31, 2015

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 Comprehensive Income	3
	Unaudited Condensed Consolidated Statements of Cash Flows	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	33
PART II.	Other Information	34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6.	Exhibits	47
Signatures		48

Table of Contents

PART I. FINANCIAL INFORMATION




Item 1.		Financial Statements

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amounts)



	July 31, 2015			October 31, 2014*
ASSETS
Current assets:
Cash and cash equivalents	$	986,423		$	985,762
Short-term investments	136,496			—
Total cash, cash equivalents and short-term investments	1,122,919			985,762
Accounts receivable, net	307,825			326,727
Deferred income taxes	75,939			111,449
Income taxes receivable and prepaid taxes	36,344			26,496
Prepaid and other current assets	84,510			54,301
Total current assets	1,627,537			1,504,735
Property and equipment, net	260,667			249,098
Goodwill	2,335,816			2,255,708
Intangible assets, net	318,499			365,030
Long-term prepaid taxes	13,800			17,645
Long-term deferred income taxes	211,733			208,156
Other long-term assets	185,920			175,127
Total assets	$	4,953,972		$	4,775,499
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	330,825		$	397,113
Accrued income taxes	25,750			31,404
Deferred revenue	912,768			928,242
Short-term debt	190,000			30,000
Total current liabilities	1,459,343			1,386,759
Long-term accrued income taxes	39,207			50,952
Long-term deferred revenue	90,569			77,646
Long-term debt	22,500			45,000
Other long-term liabilities	204,105			158,972
Total liabilities	1,815,724			1,719,329
Stockholders’ equity:
Preferred stock, $0.01 par value: 2,000 shares authorized; none outstanding	—			—
Common stock, $0.01 par value: 400,000 shares authorized; 155,929 and 155,965 shares outstanding, respectively	1,559			1,560
Capital in excess of par value	1,604,994			1,614,603
Retained earnings	1,688,764			1,551,592
Treasury stock, at cost: 1,336 and 1,299 shares, respectively	(61,204		)	(49,496		)
Accumulated other comprehensive income (loss)	(95,865		)	(62,089		)
Total stockholders’ equity	3,138,248			3,056,170
Total liabilities and stockholders’ equity	$	4,953,972		$	4,775,499

* Derived from audited financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



	Three Months Ended July 31,					Nine Months Ended July 31,
	2015			2014		2015		2014
Revenue:
Time-based license	$	445,807		$	431,184	$	1,324,677	$	1,255,515
Upfront license	48,878			31,594		139,671		101,863
Maintenance and service	61,120			59,034		190,704		161,082
Total revenue	555,805			521,812		1,655,052		1,518,460
Cost of revenue:
License	77,516			68,573		218,650		198,700
Maintenance and service	25,251			20,685		82,244		62,065
Amortization of intangible assets	26,704			26,272		78,182		74,699
Total cost of revenue	129,471			115,530		379,076		335,464
Gross margin	426,334			406,282		1,275,976		1,182,996
Operating expenses:
Research and development	197,999			182,809		567,924		528,395
Sales and marketing	116,988			112,271		343,736		332,847
General and administrative	43,925			37,438		121,254		112,246
Amortization of intangible assets	6,188			6,537		19,066		18,291
Restructuring charges	(248		)	—		15,088		—
Total operating expenses	364,852			339,055		1,067,068		991,779
Operating income	61,482			67,227		208,908		191,217
Other income (expense), net	3,711			3,544		16,784		18,797
Income before income taxes	65,193			70,771		225,692		210,014
Provision (benefit) for income taxes	9,806			5,115		49,520		13,345
Net income	$	55,387		$	65,656	$	176,172	$	196,669
Net income per share:
Basic	$	0.36		$	0.42	$	1.14	$	1.27
Diluted	$	0.35		$	0.42	$	1.12	$	1.25
Shares used in computing per share amounts:
Basic	155,533			155,194		154,835		154,611
Diluted	158,584			157,622		157,850		157,253

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)



	Three Months Ended July 31,						Nine Months Ended July 31,
	2015			2014			2015			2014
	(in thousands)
Net income	$	55,387		$	65,656		$	176,172		$	196,669
Other comprehensive income (loss):
Change in foreign currency translation adjustment	(10,283		)	1,713			(30,061		)	(9,502		)
Changes in unrealized gains (losses) on available-for-sale securities, net of tax of $0 for periods presented	(41		)	—			(11		)	—
Cash flow hedges:
Deferred gains (losses), net of tax of $675 and $6,188, for the three and nine months ended July 31, 2015, respectively, and of $311 and $502 for each of the same periods in fiscal 2014, respectively	599			(831		)	(13,521		)	1,658
Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(926) and $(4,334), for the three and nine months ended July 31, 2015, respectively, and of $(205) and $(1,784), for each of the same periods in fiscal 2014, respectively	2,390			(2,540		)	9,817			(4,973		)
Other comprehensive income (loss), net of tax effects	(7,335		)	(1,658		)	(33,776		)	(12,817		)
Comprehensive income	$	48,052		$	63,998		$	142,396		$	183,852

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Nine Months Ended July 31,
	2015			2014
Cash flow from operating activities:
Net income	$	176,172		$	196,669
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation	154,535			140,750
Stock compensation	63,463			58,341
Allowance for doubtful accounts	1,100			(750		)
(Gain) loss on sale of investments	(22		)	(6,538		)
Deferred income taxes	24,134			7,459
Net changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable	16,976			24,834
Prepaid and other current assets	(35,836		)	982
Other long-term assets	(16,141		)	(18,847		)
Accounts payable and accrued liabilities	(25,512		)	(28,270		)
Income taxes	(20,633		)	(18,950		)
Deferred revenue	4,507			22,361
Net cash provided by operating activities	342,743			378,041
Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments	48,155			—
Purchases of short-term investments	(185,402		)	—
Proceeds from sales of long-term investments	—			7,313
Purchases of property and equipment	(67,708		)	(58,085		)
Cash paid for acquisitions and intangible assets, net of cash acquired	(126,883		)	(373,513		)
Capitalization of software development costs	(2,798		)	(2,812		)
Other	900			(3,000		)
Net cash used in investing activities	(333,736		)	(430,097		)
Cash flows from financing activities:
Proceeds from credit facility	410,000			200,000
Repayment of debt	(272,924		)	(223,239		)
Issuances of common stock	56,414			45,336
Purchases of treasury stock	(180,000		)	(79,747		)
Other	(116		)	(5,008		)
Net cash provided by (used in) financing activities	13,374			(62,658		)
Effect of exchange rate changes on cash and cash equivalents	(21,720		)	(4,681		)
Net change in cash and cash equivalents	661			(119,395		)
Cash and cash equivalents, beginning of year	985,762			1,022,441
Cash and cash equivalents, end of period	$	986,423		$	903,046

See accompanying notes to unaudited condensed consolidated financial statements.

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 global leader in providing software, intellectual property and services used to design integrated circuits and electronic systems. The Company supplies the electronic design automation (EDA) software that engineers use to design, create prototypes for and test integrated circuits, also known as chips. The Company also offers intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. The Company provides software and hardware used to develop the electronic systems that incorporate chips and the software that runs on them. To complement these product offerings, the Company provides technical services to support these solutions and help its customers develop chips and electronic systems. The Company is also a leading provider of software tools that developers use to improve the quality, security and time-to-market of software code in a wide variety of industries, including electronics, financial services, energy, and industrials.

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 unaudited condensed consolidated balance sheets, results of operations, comprehensive income 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, 2014 as filed with the SEC on December 15, 2014.

Use of Estimates. 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 unaudited condensed 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’s fiscal year generally ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, the Company has a 53-week year. When a 53-week year occurs, the Company includes the additional week in the first fiscal quarter to realign fiscal quarters with calendar quarters. Fiscal 2015 and 2014 are both 52-week years. The third fiscal quarters, and first nine months, of fiscal 2015 and 2014 ended on August 1, 2015 and August 2, 2014, respectively, and the prior fiscal year ended on November 1, 2014. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.

Subsequent Events. The Company has evaluated subsequent events through the date that these unaudited condensed consolidated financial statements were issued.

Note 3. Business Combinations

During the nine months ended July 31, 2015, the Company completed several acquisitions. The aggregated total purchase consideration was $120.8 million, net of cash acquired. The Company does not consider these acquisitions to be material, individually or in the aggregate, to the Company’s balance sheet and results of operations. The preliminary purchase price allocation was as follows: $8.4 million of net assumed liabilities based on the respective fair values at the acquisition dates, $92.2 million of goodwill, of which $2.3 million is deductible for tax purposes, and $37.1 million of acquired identifiable intangible assets valued using the income or cost methods. The intangible assets are being amortized over their respective useful lives ranging from one to six years. The acquisition-related costs totaling $4.4 million were expensed as incurred in the condensed unaudited consolidated statement of operations. The Company funded the acquisitions with existing cash.

Table of Contents

The preliminary fair value estimates for the assets acquired and liabilities assumed for these acquisitions are not yet finalized and may change as additional information becomes available during the respective measurement periods. The primary areas of those preliminary estimates relate to certain tangible assets and liabilities, identifiable intangible assets, and taxes. Additional information, which existed as of the acquisition date but is yet unknown to the Company, may become known to the Company during the remainder of the measurement period not to exceed 12 months from the acquisition date. Changes to the provisional amounts recorded as assets or liabilities during the measurement period may result in an adjustment to goodwill.

Note 4. Goodwill and Intangible Assets

Goodwill as of July 31, 2015 and October 31, 2014 consisted of the following:



	(in thousands)
As of October 31, 2014	$	2,255,708
Additions	92,186
Adjustments(1)	684
Effect of foreign currency translation	(12,762		)
As of July 31, 2015	$	2,335,816


(1)	Adjustments relate to changes in estimates for acquisitions that closed in the prior fiscal year for which the purchase price allocation was finalized during the reporting period.

Intangible assets as of July 31, 2015 consisted of the following:



	Gross Assets		Accumulated Amortization		Net Assets
	(in thousands)
Core/developed technology	$	540,740	$	353,469	$	187,271
Customer relationships	211,611		108,957		102,654
Contract rights intangible	147,127		131,895		15,232
Covenants not to compete	2,530		2,530		—
Trademarks and trade names	19,079		9,872		9,207
In-process research and development (IPR&D)(2)	—		—		—
Capitalized software development costs	24,627		20,492		4,135
Total	$	945,714	$	627,215	$	318,499

Intangible assets as of October 31, 2014 consisted of the following:



	Gross Assets		Accumulated Amortization		Net Assets
	(in thousands)
Core/developed technology	$	490,242	$	298,705	$	191,537
Customer relationships	210,172		92,146		118,026
Contract rights intangible	146,364		109,067		37,297
Covenants not to compete	2,530		2,530		—
Trademarks and trade names	18,779		7,765		11,014
In-process research and development (IPR&D)(2)	3,086		—		3,086
Capitalized software development costs	21,829		17,759		4,070
Total	$	893,002	$	527,972	$	365,030


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

Table of Contents

Amortization expense related to intangible assets consisted of the following:



	Three Months Ended July 31,				Nine Months Ended July 31,
	2015		2014		2015		2014
	(in thousands)
Core/developed technology	$	18,822	$	18,354	$	54,639	$	51,966
Customer relationships	5,443		5,816		16,906		16,655
Contract rights intangible	7,917		7,913		23,595		22,719
Covenants not to compete	—		17		—		50
Trademarks and trade names	709		709		2,107		1,600
Capitalized software development costs(3)	916		906		2,732		2,655
Total	$	33,807	$	33,715	$	99,979	$	95,645


(3)	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 2015	$	34,126
2016	105,173
2017	68,229
2018	50,718
2019	27,945
2020 and thereafter	32,308
Total	$	318,499

Note 5. Financial Assets and Liabilities

Cash equivalents and short-term investments. The Company classifies time deposits and other investments with maturities less than three months as cash equivalents. Debt securities and other investments with maturities longer than three months are classified as short-term investments. The Company’s investments generally have a term of less than three years and are classified as available-for-sale carried at fair value, with unrealized gains and losses included in the unaudited condensed consolidated balance sheet as a component of accumulated other comprehensive income (loss), net of tax. Those unrealized gains or losses deemed other than temporary are reflected in other income (expense), net. The cost of securities sold is based on the specific identification method and realized gains and losses are included in other income (expense), net.

Table of Contents

During the first quarter of fiscal 2015, the Company made investments in available-for-sale securities. As of July 31, 2015, the balances of these investments are:



	Cost		Gross Unrealized Gains		Gross Unrealized Losses Less Than 12 Months			Gross Unrealized Losses 12 Months or Longer		Estimated Fair Value(1)
	(in thousands)
Cash equivalents:
Money market funds	$	357,485	$	—	$	—		$	—	$	357,485
Commercial paper	2,348		—		—			—		2,348
Total:	359,833		—		—			—		359,833
Short-term investments:
U.S. government agency securities	16,605		4		(2		)	—		16,607
Municipal bonds	1,403		2		—			—		1,405
Certificates of deposit	7,800		—		—			—		7,800
Commercial paper	10,287		—		—			—		10,287
Corporate debt securities	70,451		11		(22		)	—		70,440
Asset-backed securities	29,961		5		(9		)	—		29,957
Total:	136,507		22		(33		)	—		136,496


(1)	See Note 6. Fair Value Measures for further discussion on fair values of cash equivalents and short-term investments.

As of July 31, 2015, the stated maturities of the Company's short-term investments are:



	Amortized Cost		Fair Value
	(in thousands)
Due in 1 year or less	$	78,364	$	78,364
Due in 2-5 years	58,037		58,026
Due in 6-10 years	106		106
Total	$	136,507	$	136,496

Non-marketable equity securities. The Company’s strategic investment portfolio consists of non-marketable equity securities in privately-held companies. The securities accounted for under cost method investments are reported at cost net of impairment losses. Securities accounted for under equity method investments are recorded at cost plus the proportional share of the issuers’ income or loss, which is recorded in the Company’s other income (expense), net. The cost basis of securities sold is based on the specific identification method. Refer to Note 6. Fair Value Measures.

Derivatives. The Company recognizes derivative instruments as either assets or liabilities in the unaudited condensed consolidated financial statements at fair value and provides qualitative and quantitative disclosures about such derivatives. The Company operates internationally and is exposed to potentially adverse movements in foreign currency exchange rates. The Company enters into hedges in the form of foreign currency forward contracts to reduce its exposure to foreign currency rate changes on non-functional currency denominated forecasted transactions and balance sheet positions including: (1) certain assets and liabilities, (2) shipments forecasted to occur within approximately 1 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 approximately one month to 22 months, the majority of which are short-term. The Company does not use foreign currency forward contracts for speculative or trading purposes.

Table of Contents

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 accrued liabilities in the unaudited condensed consolidated balance sheets. 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. These contracts have durations of approximately 22 months or less. Certain forward contracts are rolled over periodically to capture the full length of exposure to the Company’s foreign currency risk, which can be up to three years. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on the 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 other comprehensive income (OCI) in stockholders’ equity and reclassified into revenue or operating expenses, as appropriate, at the time the hedged transactions affect earnings. The Company expects a majority of the hedge balance in OCI to be reclassified to the statements of operations within the next twelve months.

Hedging effectiveness is evaluated monthly using spot rates, with any gain or loss caused by hedging ineffectiveness recorded in other income (expense), net. The premium/discount component of the forward contracts is recorded to other income (expense), 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. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), 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 (expense), net. The duration of the forward contracts for hedging the Company’s balance sheet exposure is approximately one month.

The Company also has certain foreign exchange forward contracts for hedging certain international revenues and expenses that are not designated as hedging instruments. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), 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 one year. The overall goal of the Company’s hedging program is to minimize the impact of currency fluctuations on its net income over its fiscal year.

The effects of the changes in the fair values of non-designated forward contracts are summarized as follows:



	Three Months Ended July 31,						Nine Months Ended July 31,
	2015			2014			2015			2014
	(in thousands)
Gain (loss) recorded in other income (expense), net	$	(1,409	)	$	(53	)	$	(4,402	)	$	(667	)

The notional amounts in the table below for derivative instruments provide one measure of the transaction volume outstanding:



	As of July 31, 2015			As of October 31, 2014
	(in thousands)
Total gross notional amount	$	639,416		$	793,937
Net fair value	$	(501	)	$	(2,455	)

The notional amounts for derivative instruments do not represent the amount of the Company’s exposure to market gain or loss. The Company’s exposure to market gain or loss will vary over time as a function of currency

Table of Contents

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 unaudited condensed consolidated balance sheet location and amount of derivative instrument fair values segregated between designated and non-designated hedge instruments:



	Fair values of derivative instruments designated as hedging instruments		Fair values of derivative instruments not designated as hedging instruments
	(in thousands)
As of July 31, 2015
Other current assets	$	11,306	$	557
Accrued liabilities	$	12,329	$	34
As of October 31, 2014
Other current assets	$	9,299	$	1
Accrued liabilities	$	11,656	$	99

The following table represents the unaudited condensed consolidated statement of operations location and amount of gains and losses on derivative instrument fair values for designated hedge instruments, net of tax:



	Location of gain (loss) recognized in OCI on derivatives	Amount of gain (loss) recognized in OCI on derivatives (effective portion)			Location of gain (loss) reclassified from OCI	Amount of gain (loss) reclassified from OCI (effective portion)
	(in thousands)
Three months ended July 31, 2015
Foreign exchange contracts	Revenue	$	1,994		Revenue	$	4,005
Foreign exchange contracts	Operating expenses	(1,356		)	Operating expenses	(6,395		)
Total		$	638			$	(2,390	)
Three months ended July 31, 2014
Foreign exchange contracts	Revenue	$	(40	)	Revenue	$	1,563
Foreign exchange contracts	Operating expenses	(815		)	Operating expenses	977
Total		$	(855	)		$	2,540
Nine months ended July 31, 2015
Foreign exchange contracts	Revenue	$	5,334		Revenue	$	6,411
Foreign exchange contracts	Operating expenses	(18,855		)	Operating expenses	(16,228		)
Total		$	(13,521	)		$	(9,817	)
Nine months ended July 31, 2014
Foreign exchange contracts	Revenue	$	3,324		Revenue	$	3,237
Foreign exchange contracts	Operating expenses	(1,707		)	Operating expenses	1,736
Total		$	1,617			$	4,973

Table of Contents

The following table represents the ineffective portions and portions excluded from effectiveness testing of the hedge gains (losses) for derivative instruments designated as hedging instruments, which are recorded in other income (expense), net:



Foreign exchange contracts	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)
For the three months ended July 31, 2015	$	122	$	1,189
For the three months ended July 31, 2014	$	24	$	548
For the nine months ended July 31, 2015	$	822	$	3,495
For the nine months ended July 31, 2014	$	57	$	2,950


(1)	The ineffective portion includes forecast inaccuracies.


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

Note 6. Fair Value Measures

Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes guidelines and enhances disclosure requirements for fair value measurements. The accounting guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The accounting guidance also establishes a fair value hierarchy based on the independence of the source and objective evidence of the inputs used. There are three fair value hierarchies based upon the level of inputs that are significant to fair value measurement:

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.

On a recurring basis, the Company measures the fair value of certain of its assets and liabilities, which include cash equivalents, short-term investments, non-qualified deferred compensation plan assets, and foreign currency derivative contracts.

The Company’s cash equivalents and short-term investments are classified within Level 1 or Level 2 because they are valued using quoted market prices in an active market or alternative independent pricing sources and models utilizing market observable inputs.

The Company’s non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets and are therefore classified within Level 1.

The Company’s foreign currency derivative contracts are classified within Level 2 because these contracts are not actively traded and the valuation inputs are based on quoted prices and market observable data of similar instruments.

The Company’s borrowings under its credit and term loan facilities are classified within Level 2 because these borrowings are not actively traded and have a variable interest rate structure based upon market rates currently available to the Company for debt with similar terms and maturities. Refer to Note 8. Credit Facility.

Table of Contents

Assets and 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 July 31, 2015:



			Fair Value Measurement Using
Description	Total		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	$	357,485	$	357,485	$	—	$	—
Commercial paper	2,348		—		2,348		—
Short-term investments:
U.S. government agency securities	16,607		—		16,607		—
Municipal bonds	1,405		—		1,405		—
Certificates of deposit	7,800		—		7,800		—
Commercial paper	10,287		—		10,287		—
Corporate debt securities	70,440		—		70,440		—
Asset-backed securities	29,957		—		29,957		—
Prepaid and other current assets:
Foreign currency derivative contracts	11,863		—		11,863		—
Other long-term assets:
Deferred compensation plan assets	161,087		161,087		—		—
Total assets	$	669,279	$	518,572	$	150,707	$	—
Liabilities
Accounts payable and accrued liabilities:
Foreign currency derivative contracts	$	12,364	$	—	$	12,364	$	—
Total liabilities	$	12,364	$	—	$	12,364	$	—

Table of Contents

Assets and liabilities measured at fair value on a recurring basis are summarized below as of October 31, 2014:



			Fair Value Measurement Using
Description	Total		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	$	409,064	$	409,064	$	—	$	—
Prepaid and other current assets:
Foreign currency derivative contracts	9,300		—		9,300		—
Other long-term assets:
Deferred compensation plan assets	145,508		145,508		—		—
Total assets	$	563,872	$	554,572	$	9,300	$	—
Liabilities
Accounts payable and accrued liabilities:
Foreign currency derivative contracts	$	11,755	$	—	$	11,755	$	—
Total liabilities	$	11,755	$	—	$	11,755	$	—

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

Non-Marketable Equity Securities

Equity investments in privately-held companies, also called non-marketable equity securities, are accounted for using either the cost or equity method of accounting.

The non-marketable equity securities are measured and recorded at fair value when an event or circumstance which impacts the fair value of these securities indicates an other-than-temporary decline in value has occurred. In such events, these equity investments would be classified within Level 3 as they are valued using significant unobservable inputs or data in an inactive market, and the valuation requires management judgment due to the absence of market price and inherent lack of liquidity. The non-marketable equity securities are measured and recorded at fair value when an event or circumstance which impacts the fair value of these securities indicates an other-than-temporary decline in value has occurred. The Company monitors these investments and generally uses the income approach to assess impairments based primarily on the financial conditions of these companies.

The Company did not recognize any impairment during the three and nine months ended July 31, 2015 and 2014, respectively.

As of July 31, 2015, the fair value of the Company’s non-marketable securities was $10.6 million, of which $6.7 million and $3.9 million were accounted for under the cost method and equity method, respectively. As of October 31, 2014, the fair value of non-marketable securities was $10.9 million, of which $6.7 million and $4.2 million were accounted for under the cost method and equity method, respectively.

Note 7. Liabilities and Restructuring Charges

In November 2014, the Company initiated a restructuring program that included a voluntary retirement program (VRP) and a minimal headcount reduction program. The VRP was offered to certain eligible employees in the United States and enrollment for those employees was completed on November 21, 2014. The total cost of the restructuring program was $15.1 million, of which $0.8 million and $15.1 million were paid during the three and nine months ended July 31, 2015, respectively. As of July 31, 2015, there is no outstanding balance in restructuring charges.

Table of Contents

Accounts payable and accrued liabilities consist of:



	July 31, 2015		October 31, 2014
	(in thousands)
Payroll and related benefits	$	257,342	$	302,295
Other accrued liabilities	54,793		66,666
Accounts payable	18,690		28,152
Total	$	330,825	$	397,113

Other long-term liabilities consist of:



	July 31, 2015		October 31, 2014
	(in thousands)
Deferred compensation liability	$	161,087	$	145,508
Other long-term liabilities	43,018		13,464
Total	$	204,105	$	158,972

Note 8. Credit Facility

On February 17, 2012, the Company entered into an agreement with several lenders (the Credit Agreement) providing for (i) a $350.0 million senior unsecured revolving credit facility (the Revolver) and (ii) a $150.0 million senior unsecured term loan facility (the Term Loan). Principal payments on a portion of the Term Loan are due in equal quarterly installments of $7.5 million, with the remainder due in October 2016. The Company can elect to make prepayments on the Term Loan, in whole or in part, without premium or penalty. On May 19, 2015, the Credit Agreement was amended and restated in order to increase the size of the Revolver from $350.0 million to $500.0 million and to extend the termination date of the Revolver from October 14, 2016 to May 19, 2020. The amended and restated Credit Agreement also replaced a financial covenant requiring the Company to maintain a minimum specified level of cash with a covenant requiring a minimum interest coverage ratio. Subject to obtaining additional commitments from lenders, the principal amount of the loans provided under the amended and restated Credit Agreement may be increased by the Company by up to an additional $150.0 million through May 2019. The amended and restated Credit Agreement contains financial covenants requiring the Company to operate within a maximum leverage ratio and a minimum interest coverage ratio, as well as other non-financial covenants.

As of July 31, 2015, the Company had a $52.5 million outstanding balance under the Term Loan, of which $22.5 million is classified as long term, and a $160.0 million outstanding balance under the Revolver, which is all considered short term. As of October 31, 2014, the Company had a $75.0 million outstanding balance under the Term Loan, of which $45.0 million was classified as long term, and no outstanding balance under the Revolver. Borrowings bear interest at a floating rate based on a margin over the Company’s choice of market observable base rates as defined in the amended and restated Credit Agreement. As of July 31, 2015, borrowings under the Term Loan bore interest at LIBOR +1.125% and the applicable interest rate for the Revolver was LIBOR +1.000%. In addition, commitment fees are payable on the Revolver at rates between 0.125% and 0.200% per year based on the Company’s leverage ratio on the daily amount of the revolving commitment.

The carrying amount of the short-term and long-term debt approximates the estimated fair value. These borrowings under the amended and restated Credit Agreement have a variable interest rate structure and are classified within Level 2 of the fair value hierarchy.

Table of Contents

Note 9. Accumulated Other Comprehensive Income (Loss)

Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:



	July 31, 2015			October 31, 2014
	(in thousands)
Cumulative currency translation adjustments	$	(81,002	)	$	(50,941	)
Unrealized gain (loss) on derivative instruments, net of taxes	(14,852		)	(11,148		)
Unrealized gain (loss) on available-for-sale securities, net of taxes	(11		)	—
Total accumulated other comprehensive income (loss)	$	(95,865	)	$	(62,089	)

The effect of amounts reclassified out of each component of accumulated other comprehensive income (loss) into net income was as follows:



	Three Months Ended July 31,					Nine Months Ended July 31,
	2015			2014		2015			2014
	(in thousands)
Reclassifications from accumulated other comprehensive income (loss) into unaudited condensed consolidated statement of operations:
Gain (loss) on cash flow hedges, net of taxes
Revenues	$	4,005		$	1,563	$	6,411		$	3,237
Operating expenses	(6,395		)	977		(16,228		)	1,736
Gain (loss) on available-for-sale securities
Other income (expense)	$	5		—		22			$	—
Total reclassifications into net income	$	(2,385	)	$	2,540	$	(9,795	)	$	4,973

Note 10. Stock Repurchase Program

The Company’s Board of Directors (the Board) previously approved a stock repurchase program pursuant to which the Company was authorized to purchase up to $500.0 million of its common stock, and has periodically replenished the stock repurchase program to such amount. The Board replenished the stock repurchase program up to $500.0 million on December 3, 2013, as announced on December 4, 2013. The program does not obligate Synopsys to acquire any particular amount of common stock, and the program may be suspended or terminated at any time by Synopsys’ Chief Financial Officer or the Board. The Company repurchases shares to offset dilution caused by ongoing stock issuances from existing equity plans for equity compensation awards and issuances related to acquisitions, and when management believes it is a good use of cash. Repurchases are transacted in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), and may be made through any means including, but not limited to, open market purchases, plans executed under Rule 10b5-1(c) of the Exchange Act and structured transactions. As of July 31, 2015, $200.3 million remained available for further repurchases under the program.

In December 2014, the Company entered into an accelerated share repurchase agreement (the 2015 ASR) to repurchase an aggregate of $180.0 million of the Company’s common stock. Pursuant to the 2015 ASR, the Company made a prepayment of $180.0 million of which an initial share value of $144.0 million was delivered in December and the $36.0 million forward equity contract was settled during the third fiscal quarter of fiscal 2015. Total shares purchased under the 2015 ASR were approximately 4.0 million shares at an average purchase price of $45.37 per share.

Table of Contents

Stock repurchase activities are as follow:



	Three Months Ended July 31,				Nine Months Ended July 31,
	2015		2014		2015		2014
	(in thousands)
Total shares repurchased	678		—		3,968		2,050
Total cost of the repurchased shares	$	36,000	$	—	$	180,000	$	79,747
Reissuance of treasury stock	1,553		931		3,931		3,519

Note 11. Stock Compensation

The compensation cost recognized in the unaudited condensed consolidated statements of operations for the Company’s stock compensation arrangements was as follows:



	Three Months Ended July 31,						Nine Months Ended July 31,
	2015			2014			2015			2014
	(in thousands)
Cost of license	$	2,463		$	2,176		$	6,673		$	5,952
Cost of maintenance and service	547			684			1,574			1,646
Research and development expense	11,955			10,126			32,432			28,037
Sales and marketing expense	5,268			4,696			13,573			12,394
General and administrative expense	3,672			3,717			10,517			10,312
Stock compensation expense before taxes	23,905			21,399			64,769			58,341
Income tax benefit	(5,637		)	(4,905		)	(15,273		)	(13,372		)
Stock compensation expense after taxes	$	18,268		$	16,494		$	49,496		$	44,969

As of July 31, 2015, there was $177.8 million of unamortized share-based compensation expense, which is expected to be amortized over a weighted-average period of approximately 2.7 years.

The intrinsic values of equity awards exercised during the periods are as follows:



	Three Months Ended July 31,				Nine Months Ended July 31,
	2015		2014		2015		2014
	(in thousands)
Intrinsic value of awards exercised	$	17,631	$	3,709	$	42,262	$	23,556

Note 12. Net Income per Share

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

Table of Contents

The table below reconciles 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 July 31,				Nine Months Ended July 31,
	2015		2014		2015		2014
	(in thousands, except per share amounts)
Numerator:
Net income	$	55,387	$	65,656	$	176,172	$	196,669
Denominator:
Weighted-average common shares for basic net income per share	155,533		155,194		154,835		154,611
Dilutive effect of potential common shares from equity-based compensation	3,051		2,428		3,015		2,642
Weighted-average common shares for diluted net income per share	158,584		157,622		157,850		157,253
Net income per share:
Basic	$	0.36	$	0.42	$	1.14	$	1.27
Diluted	$	0.35	$	0.42	$	1.12	$	1.25
Anti-dilutive employee stock-based awards excluded(1)	563		2,875		1,529		2,057


(1)	These employee stock-based awards were anti-dilutive for the respective periods and are excluded in calculating diluted net income per share. While such awards were anti-dilutive for the respective periods, they could be dilutive in the future.

Note 13. Segment Disclosure

Certain disclosures are required for operating segments, products and services, geographic areas of operation and major customers. Segment 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 Makers (CODMs) in deciding how to allocate resources and in assessing performance. Synopsys’ CODMs are the Company’s two Co-Chief Executive Officers.

The Company operates in a single segment to provide software products and consulting services in the EDA software industry. 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 located 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. Revenues related to operations in the United States and other geographic areas were:



	Three Months Ended July 31,				Nine Months Ended July 31,
	2015		2014		2015		2014
	(in thousands)
Revenue:
United States	$	275,625	$	268,228	$	839,325	$	745,458
Europe	80,257		65,881		227,165		203,645
Japan	50,974		61,517		165,067		184,219
Asia-Pacific and Other	148,949		126,186		423,495		385,138
Consolidated	$	555,805	$	521,812	$	1,655,052	$	1,518,460

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

Table of Contents

One customer accounted for 13.1% and 10.5% of the Company’s unaudited condensed consolidated revenue in the three months ended July 31, 2015 and 2014, respectively, and accounted for 12.3% and 10.7% of the Company’s unaudited condensed consolidated revenue in the nine months ended July 31, 2015 and 2014, respectively.

Note 14. Other Income (Expense), net

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



	Three Months Ended July 31,						Nine Months Ended July 31,
	2015			2014			2015			2014
	(in thousands)
Interest income	$	540		$	294		$	2,240		$	975
Interest expense	(599		)	(715		)	(2,057		)	(1,654		)
Gain (loss) on assets related to executive deferred compensation plan	1,815			3,069			7,091			7,529
Foreign currency exchange gain (loss)	1,111			80			5,317			865
Other, net	844			816			4,193			11,082
Total	$	3,711		$	3,544		$	16,784		$	18,797

Note 15. Taxes

Effective Tax Rate

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 (benefit) for income taxes and the effective tax rates:



	Three Months Ended July 31,						Nine Months Ended July 31,
	2015			2014			2015			2014
	(in thousands)
Income before income taxes	$	65,193		$	70,771		$	225,692		$	210,014
Provision (benefit) for income taxes	$	9,806		$	5,115		$	49,520		$	13,345
Effective tax rate	15.0		%	7.2		%	21.9		%	6.4		%

The Company’s effective tax rate for the three and nine months ended July 31, 2015 is lower than the statutory federal income tax rate of 35% primarily due to the lower tax rates applicable to its non-U.S. operations and U.S. federal and California research tax credits, partially offset by state taxes, non-deductible stock compensation, and the integration of acquired technologies.

The Company's effective tax rate increased in the three and nine months ended July 31, 2015, as compared to the same periods in fiscal 2014, primarily due to the net impact of the integration of acquired technologies, partially offset by the reinstatement of the U.S. federal research tax credit through December 31, 2014. The effective tax rate for the three and nine months ended July 31, 2014 was lower due to the tax benefits of statutes of limitation lapses and settlements with the Taiwan tax authorities for fiscal 2010 and 2009 and with the IRS for fiscal 2012.

On December 19, 2014, the president signed into law the Tax Increase Prevention Act of 2014 which reinstated the research tax credit retroactive to January 1, 2014 and extended the credit through December 31, 2014. As a result of the new legislation, the Company recognized a benefit in the first quarter of fiscal 2015 related to ten months of fiscal 2014 as well as a benefit to the annual effective tax rate for two months of fiscal 2015.

On July 27, 2015, the Tax Court issued an opinion (Altera Corp. et al. v. Commissioner) regarding the treatment of stock-based compensation expense in intercompany cost-sharing arrangements. However, U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. Also, there is uncertainty related to the IRS response to the Tax Court opinion, the final resolution of this issue, and the potential favorable benefits to the Company. As such, no impact will be recorded at this time. The Company will

Table of Contents

continue to monitor developments related to this opinion and the potential impact of those developments on the Company’s current and prior fiscal years.

The Company’s total gross unrecognized tax benefits at July 31, 2015 are $115.0 million exclusive of interest and penalties. If the total gross unrecognized tax benefits at July 31, 2015 were recognized in the future, approximately $115.0 million would decrease the effective tax rate.

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 coming twelve months, it is reasonably possible that either certain audits will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. 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 $23 million.

IRS Examinations

In the third quarter of fiscal 2015, the Company reached final settlement with the Examination Division of the IRS on the integration of acquired technologies for fiscal 2015 and research tax credit for fiscal 2014 that resulted in $7.0 million and $3.2 million in tax benefits, respectively.

In the first quarter of fiscal 2014, the Company reached final settlement with the Examination Division of the IRS on the remaining fiscal 2012 issues and recognized approximately $10.0 million in unrecognized tax benefits.

Non-U.S. Examinations

In the first quarter of fiscal 2015, the Company reached final settlement with the Taiwan tax authorities for fiscal 2012, with regard to certain transfer pricing issues. As a result of the settlement the Company recognized approximately $1.1 million in unrecognized tax benefits.

In the second quarter of fiscal 2014, the Company reached settlements with the Taiwan tax authorities for fiscal 2010 and 2009, with regard to certain transfer pricing issues. As a result of the settlements and the application of the settlements to other open fiscal years, the Company's unrecognized tax benefits decreased by $5.1 million. The net tax benefit resulting from the settlements and the application to other open fiscal years was $3.9 million.

Note 16. Effect of New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” This ASU requires an entity to recognize revenue when goods are transferred or services are provided to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU also requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date.” With the issuance of ASU 2015-14, the new revenue guidance ASU 2014-09 will be effective for fiscal 2019, including interim periods within that reporting period, using one of two prescribed retrospective methods. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.

Table of Contents



Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are subject to the “safe harbor” created by those sections. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “expect,” “intend,” “believe,” “estimate,” “project” or “continue,” and the negatives of such terms are intended to identify forward-looking statements. Without limiting the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements concerning expected growth in the semiconductor industry and the effects of industry consolidation, our business outlook, our business model, our growth strategy, the ability of our prior acquisitions (including our acquisition of Coverity, Inc.) to drive revenue growth, the sufficiency of our cash, cash equivalents and short-term investments and cash generated from operations, our future liquidity requirements, and other statements that involve certain known and unknown risks, uncertainties and other factors that could cause our actual results, time frames or achievements to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those identified below in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. The information included herein represents our estimates and assumptions as of the date of this filing. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. All subsequent written or oral forward-looking statements attributable to Synopsys 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 Securities and Exchange Commission (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, 2014, as filed with the SEC on December 15, 2014.

Overview

Business Summary

Synopsys is a global leader in providing software, intellectual property and services used to design integrated circuits and electronic systems. We supply the electronic design automation (EDA) software that engineers use to design, create prototypes for and test integrated circuits, also known as chips. We also offer intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. We provide software and hardware used to develop the electronic systems that incorporate chips and the software that runs on them. To complement these product offerings, we provide technical services to support our solutions and help our customers develop chips and electronic systems. We are also a leading provider of software tools that developers use to improve the quality, security, and time-to-market of software code in a wide variety of industries, including electronics, financial services, energy, and industrials.

Our EDA and IP customers are generally semiconductor and electronics systems companies. Our solutions help them overcome the challenge of developing increasingly advanced electronics products while reducing their design and manufacturing costs. While our products are an important part of our customers’ development process, our customers’ research and development budget and spending decisions may be affected by their business outlook and their willingness to invest in new and increasingly complex chip designs. In addition, a number of consolidations have taken place in the semiconductor industry recently. While we do not believe customer consolidations have had a material impact on our results, the future impact is uncertain. Please see the risk factor titled “Consolidation among our customers, as well as within the industries in which we operate, may negatively impact our operating results.” in Part II, Item 1A. Risk Factors for a discussion of potential risks.

Despite global economic uncertainty, we have maintained profitability and positive cash flow on an annual basis in recent years. We achieved these results not only because of our solid execution, leading technology and strong customer relationships, but also because of our time-based revenue business model. Under this model, a substantial majority of our customers pay for their licenses over time and we typically recognize this revenue over the life of the contract, which averages approximately three years. Time-based revenue, which consists of time-

Table of Contents

based license, maintenance and service revenue, generally represents approximately 90% of our total revenue. The revenue we recognize in a particular period generally results from selling efforts in prior periods rather than the current period. Due to our business model, decreases as well as increases in customer spending do not immediately affect our revenues in a significant way.

Our growth strategy is based on building on our leadership in our EDA products, expanding and proliferating our IP offerings, and driving growth in the software quality and security market, which we entered with our acquisition of Coverity, Inc. We have continued to make investments in the software quality and security space with additional recent acquisitions, which we believe has expanded our total addressable market. As we continue to expand our product portfolio and our total addressable market, for instance in IP products, we may experience increased variability in our revenue, though we generally expect time-based revenue to continue to represent approximately 90% of our total revenue. Overall, our business outlook remains solid based on our leading technology, customer relationships, business model, diligent expense management, and acquisition strategy. We believe that these factors will help us continue to successfully execute our strategies.

Financial Performance Summary

In the third quarter of fiscal 2015, compared to the same period of fiscal 2014:


•	Total revenue was $555.8 million, an increase of $34.0 million or 7%, primarily due to continued growth both organically and through prior-year acquisitions.


•	Total cost of revenue and operating expenses was $494.3 million, an increase of $39.7 million or 9%, primarily due to our operational growth and prior-year acquisitions resulting in higher employee-related costs.


•	Our net income of $55.4 million was lower by $10.2 million or 16% due to increase in operating expenses as a result of increase in headcount and timing of expenses.

We continued to derive more than 90% of our total revenue from time-based revenue.

New Accounting Pronouncements

See Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial results under the heading “Results of Operations” below are based on our unaudited condensed consolidated financial statements, which we have prepared in accordance with GAAP. 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 ongoing basis, we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates.

The accounting policies that most frequently require us to make assumptions, judgments and estimates, and therefore are critical to understanding our results of operations, are:


•	Revenue recognition;


•	Valuation of stock compensation;


•	Valuation of intangible assets; and


•	Income taxes.

Our 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, 2014, filed with the SEC on December 15, 2014.

Table of Contents

Results of Operations

Revenue Background

We generate our revenue from the sale of software licenses, maintenance and professional services and to a small extent, hardware products. 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 services fees. Hardware revenue consists of FPGA-based emulation and prototyping products.

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


•	Technology Subscription Licenses (TSLs). 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. 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. 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 statements 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 and 100% of the maintenance 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 statements of operations. For term licenses in which less than 75% of the license fee and 100% of the maintenance fee is payable within one year from shipment, we recognize revenue as customer payments become due and payable. Such revenue is reported as “time-based license revenue” in the unaudited condensed consolidated statements 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 and 100% of the maintenance 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 statements of operations. For perpetual licenses in which less than 75% of the license fee and 100% of the maintenance fee is payable 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 statements of operations.

Under current accounting rules and policies, we recognize revenue from orders we receive for software licenses, services and hardware products 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 delivered. The weighted-average license term of the TSLs and term licenses we entered into for the three months ended July 31, 2015 and 2014 was 2.5 and 3.1 years, respectively. Revenue on contracts requiring significant modification or development is accounted for using the percentage of completion method over the period of the development. Revenue on hardware product orders is generally recognized in full at the time the product is shipped. Contingent revenue is recognized if and when the applicable event occurs.

Revenue on maintenance orders is recognized ratably over the maintenance period (normally one year). Revenue on professional services orders is generally recognized after services are performed and accepted by the customer.

Table of Contents

Our revenue in any period is equal to the sum of our time-based license, upfront license, maintenance and professional services for the period. We derive time-based license revenue largely from TSL orders received and delivered in prior quarters and to a smaller extent due to contracts in which revenue is recognized as customer installments become due and payable and from contingent revenue arrangements. We derive upfront license revenue directly from term and perpetual license and hardware product orders mostly booked and shipped during the period. We derive maintenance revenue largely from maintenance orders received in prior periods since our maintenance orders generally yield revenue ratably over a term of one year. We also derive professional services revenue primarily from orders received in prior quarters, since we recognize revenue from professional services as those services are delivered and accepted or on percentage of completion for arrangements requiring significant modification of our software, and 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 delivered 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, a $120,000 order for perpetual and term licenses with greater than 75% of the license fee due within one year from shipment typically generates $120,000 in revenue in the quarter the product is delivered, but no future revenue. Additionally, revenue in a particular quarter may also be impacted by perpetual and term licenses in which less than 75% of the license fees and 100% of the maintenance fees are payable within one year from shipment as the related revenue will be recognized as revenue in the period when customer payments become due and payable.

Our customer arrangements are complex, involving hundreds of products and various license rights, and our customers bargain with us over many aspects of these arrangements. For example, they 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. No single factor typically drives our customers’ buying decisions, and we compete on all fronts to serve customers in a highly competitive EDA market. Customers generally negotiate the total value of the arrangement rather than just unit pricing or volumes.

Total Revenue



	July 31,
	2015		2014		$ Change		% Change
	(dollars in millions)
Three months ended	$	555.8	$	521.8	$	34.0	7	%
Nine months ended	$	1,655.1	$	1,518.5	$	136.6	9	%

Our revenues are subject to fluctuations, primarily due to customer requirements, including payment terms and the timing and value of contract renewals. For example, we experience variability in our quarterly revenue due to factors such as the timing of IP consulting projects and royalties, and certain contracts where revenue is recognized when customer installment payments are due, as well as variability in hardware sales.

The increase in total revenue for the three and nine months ended July 31, 2015 compared to the same periods in fiscal 2014 was due to our overall growth, higher hardware sales and, to a lesser extent, contributions from acquisitions.

Time-Based License Revenue



	July 31,
	2015			2014			$ Change		% Change
	(dollars in millions)
Three months ended	$	445.8		$	431.2		$	14.6	3	%
Percentage of total revenue	80		%	83		%
Nine months ended	$	1,324.7		$	1,255.5		$	69.2	6	%
Percentage of total revenue	80		%	83		%

The increase in time-based license revenue for the three and nine months ended July 31, 2015 compared to the same periods in fiscal 2014 was primarily attributable to an increase in TSL license revenue due to our overall growth and, to a lesser extent, contributions from acquisitions.

Table of Contents

Upfront License Revenue



	July 31,
	2015			2014			$ Change		% Change
	(dollars in millions)
Three months ended	$	48.9		$	31.6		$	17.3	55	%
Percentage of total revenue	9		%	6		%
Nine months ended	$	139.7		$	101.9		$	37.8	37	%
Percentage of total revenue	8		%	7		%

Changes in upfront license revenue are generally attributable to normal fluctuations in customer requirements, which can drive the amount of upfront orders and revenue in any particular period.

The increase in upfront license revenue for the three and nine months ended July 31, 2015 compared to the same periods in fiscal 2014 was primarily attributable to an increase in the sale of hardware products.

As our sales of hardware products grow, upfront license revenue may increase as a percentage of total revenue, but we expect it to remain consistent with our business model in which approximately 90% of our total revenue consists of time-based revenue.

Maintenance and Service Revenue



	July 31,
	2015			2014			$ Change			% Change
	(dollars in millions)
Three months ended
Maintenance revenue	$	17.7		$	18.0		$	(0.3	)	(2	)%
Professional services and other revenue	43.4			41.0			2.4			6	%
Total maintenance and service revenue	$	61.1		$	59.0		$	2.1		4	%
Percentage of total revenue	11		%	11		%
Nine months ended
Maintenance revenue	$	51.7		$	56.1		$	(4.4	)	(8	)%
Professional services and other revenue	139.0			105.0			34.0			32	%
Total maintenance and service revenue	$	190.7		$	161.1		$	29.6		18	%
Percentage of total revenue	12		%	11		%

Changes in maintenance revenue are generally attributable to timing of contract renewals and type of contracts that bundle maintenance. Maintenance revenue for the three and nine months ended July 31, 2015 compared to the same periods in fiscal 2014 was lower primarily due to the timing of renewals.

The changes in professional services and other revenue for the three and nine months ended July 31, 2015 compared to the same periods in fiscal 2014 were primarily due to the increase in, and timing of, IP consulting projects that are accounted for using the percentage of completion method.

Table of Contents

Cost of Revenue



	July 31,
	2015			2014			$ Change		% Change
	(dollars in millions)
Three months ended
Cost of license revenue	$	77.5		$	68.5		$	9.0	13	%
Cost of maintenance and service revenue	25.3			20.7			4.6		22	%
Amortization of intangible assets	26.7			26.3			0.4		2	%
Total	$	129.5		$	115.5		$	14.0	12	%
Percentage of total revenue	23		%	22		%
Nine months ended
Cost of license revenue	$	218.7		$	198.7		$	20.0	10	%
Cost of maintenance and service revenue	82.2			62.1			20.1		32	%
Amortization of intangible assets	78.2			74.7			3.5		5	%
Total	$	379.1		$	335.5		$	43.6	13	%
Percentage of total revenue	23		%	22		%

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 consulting and training services 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 maintenance 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 distribution costs, royalties paid to third-party vendors, and the amortization of capitalized research and development costs associated with software products that have reached technological feasibility.

Cost of maintenance and service revenue. Cost of maintenance and service revenue includes operating costs related to maintaining 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 recorded to cost of revenue and operating expenses, includes the amortization of core/developed technology, trademarks, trade names, customer relationships, covenants not to compete, and certain contract rights related to acquisitions.

The increase in cost of revenue for the three months ended July 31, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $6.3 million in product costs due to increased sales, $4.7 million in costs related to our professional services revenue, and $1.6 million in personnel-related costs driven by higher headcount.

The increase in cost of revenue for the nine months ended July 31, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $18.8 million in costs related to our professional services revenue, $8.9 million in product costs due to increased sales, $8.6 million in personnel-related costs driven by higher headcount, including those from acquisitions, and $3.5 million in amortization of intangible assets.

Changes in other cost of revenue categories for the above-mentioned periods were not individually material.

Table of Contents

Operating Expenses

Research and Development



	July 31,
	2015			2014			$ Change		% Change
	(dollars in millions)
Three months ended	$	198.0		$	182.8		$	15.2	8	%
Percentage of total revenue	36		%	35		%
Nine months ended	$	567.9		$	528.4		$	39.5	7	%
Percentage of total revenue	34		%	35		%

The increase in research and development expenses for the three months ended July 31, 2015 compared to the same period in fiscal 2014 was primarily due to an increase of $10.5 million in personnel-related costs principally as a result of headcount increases, including those from acquisitions, and $2.4 million higher functionally allocated expenses.

The increase in research and development expenses for the nine months ended July 31, 2015 compared to the same period in fiscal 2014 was primarily due to an increase of $25.7 million in personnel-related costs principally as a result of headcount increases, including those from acquisitions, and $10.4 million higher functionally allocated expenses.

Changes in other research and development expense categories for the above-mentioned periods were not individually material.

Sales and Marketing



	July 31,
	2015			2014			$ Change		% Change
	(dollars in millions)
Three months ended	$	117.0		$	112.3		$	4.7	4	%
Percentage of total revenue	21		%	22		%
Nine months ended	$	343.7		$	332.8		$	10.9	3	%
Percentage of total revenue	21		%	22		%

The increase in sales and marketing expenses for the three months ended July 31, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $2.5 million in personnel-related costs as a result of headcount increases, including those from acquisitions.

The increase in sales and marketing expenses for the nine months ended July 31, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $9.4 million in personnel-related costs as a result of headcount increases, including those from acquisitions, and $1.4 million in variable compensation due to higher sales.

Changes in other sales and marketing expense categories for the above-mentioned periods were not individually material.

General and Administrative



	July 31,
	2015			2014			$ Change		% Change
	(dollars in millions)
Three months ended	$	43.9		$	37.4		$	6.5	17	%
Percentage of total revenue	8		%	7		%
Nine months ended	$	121.3		$	112.2		$	9.1	8	%
Percentage of total revenue	7		%	7		%

The increase in general and administrative expenses for the three months ended July 31, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $5.2 million in facilities and depreciation expenses,

Table of Contents

including those from acquisitions, and $4.2 million in acquisition-related professional services costs, which were partially offset by higher allocations of $4.1 million in expenses to other functions.

The increase in general and administrative expenses for the nine months ended July 31, 2015 compared to the same period in fiscal 2014 was primarily due to increases of $17.5 million in facilities and depreciation expenses including those from acquisitions, $4.4 million in personnel-related costs primarily due to higher headcount, including those from acquisitions, and $4.0 million in acquisition-related professional services costs, which were partially offset by higher allocations of $17.6 million in expenses to other functions.

Changes in other general and administrative expense categories for the above-mentioned periods were not individually material.

Amortization of Intangible Assets



	July 31,
	2015			2014			$ Change			% Change
	(dollars in millions)
Three months ended
Included in cost of revenue	$	26.7		$	26.3		$	0.4		2	%
Included in operating expenses	6.2			6.5			(0.3		)	(5	)%
Total	$	32.9		$	32.8		$	0.1		—	%
Percentage of total revenue	6		%	6		%
Nine months ended
Included in cost of revenue	$	78.2