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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(MARK ONE)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO
COMMISSION FILE NUMBER: 000-19807
 
 
 
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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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.
Large accelerated filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if smaller reporting company)
  
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  ¨    No  ý
As of May 23, 2016, there were 151,826,274 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, 2016
TABLE OF CONTENTS
 
 
 
 
 
Page
PART I.
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.



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,
2016
 
 October 31,
2015*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
827,946

 
$
836,188

Short-term investments
131,976

 
128,747

      Total cash, cash equivalents and short-term investments
959,922

 
964,935

Accounts receivable, net
299,076

 
385,694

Income taxes receivable and prepaid taxes
48,397

 
46,732

Prepaid and other current assets
95,802

 
71,446

Total current assets
1,403,197

 
1,468,807

Property and equipment, net
258,856

 
263,077

Goodwill
2,500,804

 
2,471,241

Intangible assets, net
320,076

 
363,659

Long-term prepaid taxes
17,480

 
18,736

Long-term deferred income taxes
282,393

 
273,909

Other long-term assets
182,457

 
186,310

Total assets
$
4,965,263

 
$
5,045,739

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
285,196

 
$
385,542

Accrued income taxes
23,653

 
19,565

Deferred revenue
926,363

 
968,246

Short-term debt
250,000

 
205,000

Total current liabilities
1,485,212

 
1,578,353

Long-term accrued income taxes
34,471

 
37,763

Long-term deferred revenue
91,420

 
93,613

Other long-term liabilities
204,155

 
202,021

Total liabilities
1,815,258

 
1,911,750

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

 

Common stock, $0.01 par value: 400,000 shares authorized; 152,255 and 155,157 shares outstanding, respectively
1,523

 
1,552

Capital in excess of par value
1,642,783

 
1,610,460

Retained earnings
1,838,704

 
1,725,727

Treasury stock, at cost: 5,009 and 2,107 shares, respectively
(229,942
)
 
(98,375
)
Accumulated other comprehensive income (loss)
(103,063
)
 
(105,375
)
Total stockholders’ equity
3,150,005

 
3,133,989

Total liabilities and stockholders’ equity
$
4,965,263

 
$
5,045,739

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

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SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Time-based license
$
484,175

 
$
447,844

 
$
948,455

 
$
878,870

Upfront license
58,163

 
44,313

 
101,600

 
90,793

Maintenance and service
62,667

 
65,047

 
123,554

 
129,584

Total revenue
605,005

 
557,204

 
1,173,609

 
1,099,247

Cost of revenue:
 
 
 
 
 
 
 
License
85,444

 
70,350

 
161,837

 
141,134

Maintenance and service
21,631

 
29,010

 
44,156

 
56,993

Amortization of intangible assets
24,555

 
25,612

 
55,081

 
51,478

Total cost of revenue
131,630

 
124,972

 
261,074

 
249,605

Gross margin
473,375

 
432,232

 
912,535

 
849,642

Operating expenses:
 
 
 
 
 
 
 
Research and development
216,172

 
188,315

 
412,877

 
369,925

Sales and marketing
120,926

 
120,579

 
243,546

 
226,748

General and administrative
41,553

 
40,975

 
81,250

 
77,329

Amortization of intangible assets
7,024

 
6,436

 
13,959

 
12,878

Restructuring charges
894

 

 
2,987

 
15,336

Total operating expenses
386,569

 
356,305

 
754,619

 
702,216

Operating income
86,806

 
75,927

 
157,916

 
147,426

Other income (expense), net
10,417

 
7,957

 
3,649

 
13,073

Income before income taxes
97,223

 
83,884

 
161,565

 
160,499

Provision (benefit) for income taxes
27,847

 
28,288

 
32,154

 
39,714

Net income
$
69,376

 
$
55,596

 
$
129,411

 
$
120,785

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.36

 
$
0.85

 
$
0.78

Diluted
$
0.45

 
$
0.35

 
$
0.84

 
$
0.77

Shares used in computing per share amounts:
 
 
 
 
 
 
 
Basic
152,250

 
154,515

 
152,609

 
154,486

Diluted
154,536

 
157,483

 
154,921

 
157,409

See accompanying notes to unaudited condensed consolidated financial statements.


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SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
 
 
 
Net income
$
69,376

 
$
55,596

 
$
129,411

 
$
120,785

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
17,388

 
3,677

 
2,933

 
(19,778
)
Changes in unrealized gains (losses) on available-for-sale securities, net of tax of $0 for periods presented
106

 
12

 
59

 
30

Cash flow hedges:
 
 
 
 
 
 
 
Deferred gains (losses), net of tax of $(2,367) and $1,285, for the three and six months ended April 30, 2016, respectively, and of $668 and $5,513 for each of the same periods in fiscal 2015, respectively
3,041

 
(1,345
)
 
(9,593
)
 
(14,120
)
Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(1,790) and $(3,171), for the three and six months ended April 30, 2016, respectively, and of $(3,018) and $(3,408), for each of the same periods in fiscal 2015, respectively
5,197

 
6,371

 
8,913

 
7,427

Other comprehensive income (loss), net of tax effects
25,732

 
8,715

 
2,312

 
(26,441
)
Comprehensive income
$
95,108

 
$
64,311

 
$
131,723

 
$
94,344

See accompanying notes to unaudited condensed consolidated financial statements.


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SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended 
 April 30,
 
2016
 
2015
Cash flow from operating activities:
 
 
 
Net income
$
129,411

 
$
120,785

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and depreciation
107,226

 
102,051

Stock compensation
46,472

 
40,864

Allowance for doubtful accounts
450

 
600

(Gain) loss on sale of investments
(10
)
 
(17
)
Excess tax benefits from stock-based compensation
(920
)
 

Deferred income taxes
(9,984
)
 
27,636

Net changes in operating assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
93,619

 
(16,491
)
Prepaid and other current assets
(23,208
)
 
(34,584
)
Other long-term assets
656

 
(13,359
)
Accounts payable and accrued liabilities
(108,005
)
 
(62,142
)
Income taxes
4,409

 
(27,077
)
Deferred revenue
(52,852
)
 
(70,530
)
Net cash provided by operating activities
187,264

 
67,736

Cash flows from investing activities:
 
 
 
Proceeds from sales and maturities of short-term investments
75,570

 
17,721

Purchases of short-term investments
(79,079
)
 
(154,744
)
Proceeds from sales of long-term investments
1,785

 

Purchases of property and equipment
(28,900
)
 
(43,979
)
Cash paid for acquisitions and intangible assets, net of cash acquired
(46,100
)
 
(2,303
)
Capitalization of software development costs
(1,973
)
 
(1,865
)
Other

 
900

Net cash used in investing activities
(78,697
)
 
(184,270
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facility
60,000

 
250,000

Repayment of debt
(15,000
)
 
(105,424
)
Issuances of common stock
36,783

 
54,006

Purchase of equity forward contract
(20,000
)
 
(36,000
)
Purchases of treasury stock
(180,000
)
 
(144,000
)
Excess tax benefits from stock-based compensation
920

 

Other
(1,470
)
 
(116
)
Net cash provided by (used in) financing activities
(118,767
)
 
18,466

Effect of exchange rate changes on cash and cash equivalents
1,958

 
(18,849
)
Net change in cash and cash equivalents
(8,242
)
 
(116,917
)
Cash and cash equivalents, beginning of year
836,188

 
985,762

Cash and cash equivalents, end of period
$
827,946

 
$
868,845

See accompanying notes to unaudited condensed consolidated financial statements.

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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 by designers along the entire silicon to software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure the quality and security of their products. The Company is a global leader in supplying the electronic design automation (EDA) software that engineers use to design 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 offerings, which are sold primarily to semiconductor and electronics companies, 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 and security 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, 2015 as filed with the SEC on December 14, 2015.
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 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. Fiscal 2016 and 2015 are both 52-week years. The second fiscal quarters of fiscal 2016 and 2015 ended on April 30, 2016 and May 2, 2015, respectively, and the prior fiscal year ended on October 31, 2015. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Note 3. Business Combinations
During the six months ended April 30, 2016, the Company completed several acquisitions. The aggregate total purchase consideration was $40.4 million, net of cash acquired. The Company does not consider these acquisitions to be material, individually or in the aggregate, to the Company’s consolidated balance sheet and results of operations. The preliminary purchase price allocations resulted in $27.2 million of goodwill, of which $6.1 million is deductible for tax purposes, and $16.9 million of acquired identifiable intangible assets valued using an income method. The intangible assets are being amortized over their respective useful lives ranging from one to seven years. The acquisition-related costs for these acquisitions totaling $2.0 million were expensed as incurred in the condensed unaudited consolidated statement of operations. The Company funded the acquisitions with existing cash.
The preliminary fair value estimates for the assets acquired and liabilities assumed for all fiscal 2016 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

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liabilities, identifiable intangible assets, and taxes. Additional information, which existed as of the acquisition date but is not yet known to the Company, may become known to the Company during the remainder of the measurement period, a 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 April 30, 2016 and October 31, 2015 consisted of the following:
 
(in thousands)
As of October 31, 2015
$
2,471,241

Additions
27,224

Adjustments(1)
140

Effect of foreign currency translation
2,199

As of April 30, 2016
$
2,500,804


(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 April 30, 2016 consisted of the following:
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
604,463

 
$
419,254

 
$
185,209

Customer relationships
235,697

 
127,603

 
108,094

Contract rights intangible
167,647

 
153,590

 
14,057

Covenants not to compete
2,530

 
2,530

 

Trademarks and trade names
20,729

 
12,248

 
8,481

Capitalized software development costs
27,483

 
23,248

 
4,235

Total
$
1,058,549

 
$
738,473

 
$
320,076

 
Intangible assets as of October 31, 2015 consisted of the following:
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
584,293

 
$
375,395

 
$
208,898

Customer relationships
231,908

 
115,170

 
116,738

Contract rights intangible
165,623

 
141,763

 
23,860

Covenants not to compete
2,530

 
2,530

 

Trademarks and trade names
20,729

 
10,665

 
10,064

Capitalized software development costs
25,511

 
21,412

 
4,099

Total
$
1,030,594

 
$
666,935

 
$
363,659

 

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Amortization expense related to intangible assets consisted of the following:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Core/developed technology
$
21,607

 
$
17,808

 
$
43,863

 
$
35,817

Customer relationships
6,295

 
5,715

 
12,488

 
11,462

Contract rights intangible
2,885

 
7,826

 
11,106

 
15,678

Trademarks and trade names
792

 
699

 
1,583

 
1,398

Capitalized software development costs(2)
921

 
911

 
1,836

 
1,817

Total
$
32,500

 
$
32,959

 
$
70,876

 
$
66,172

 
(2) 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 the existing intangible assets:
Fiscal Year
(in thousands)
Remainder of fiscal 2016
$
61,299

2017
94,184

2018
68,496

2019
44,920

2020
30,861

2021 and thereafter
20,316

Total
$
320,076


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 sheets 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.

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As of April 30, 2016, the balances of our available-for-sale securities 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
$
308,004

 
$

 
$

 
$

 
$
308,004

Commercial paper
600

 

 

 

 
600

Certificates of deposit
4,901

 

 

 

 
4,901

U.S. government agency securities
3,399

 

 

 

 
3,399

Total:
$
316,904

 
$

 
$

 
$

 
$
316,904

Short-term investments:
 
 
 
 
 
 
 
 
 
U.S. government agency securities
$
11,612

 
$
2

 
$
(2
)
 
$

 
$
11,612

Municipal bonds
1,401

 
1

 

 

 
1,402

Certificates of deposit
13,598

 

 

 

 
13,598

Commercial paper
12,010

 

 

 

 
12,010

Corporate debt securities
66,777

 
43

 
(9
)
 

 
66,811

Asset-backed securities
20,591

 
8

 
(10
)
 

 
20,589

Non-U.S. government agency securities
1,005

 

 
(1
)
 

 
1,004

Other
4,950

 

 

 

 
4,950

Total:
$
131,944

 
$
54

 
$
(22
)
 
$

 
$
131,976

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

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As of October 31, 2015, the balances of our available-for-sale securities are:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses Less Than 12 Continuous Months
 
Gross
Unrealized
Losses 12 Continuous Months or Longer
 
Estimated
Fair Value(1)
 
(in thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
 
Money market funds
$
233,839

 
$

 
$

 
$

 
$
233,839

Commercial paper
1,834

 

 

 

 
1,834

Certificates of deposit
3,500

 

 

 

 
3,500

Asset-backed securities
300

 

 
(1
)
 

 
299

Total:
$
239,473

 
$

 
$
(1
)
 
$

 
$
239,472

Short-term investments:
 
 
 
 
 
 
 
 
 
U.S. government agency securities
$
12,615

 
$
3

 
$
(4
)
 
$

 
$
12,614

Municipal bonds
1,403

 
1

 
(1
)
 

 
1,403

Certificates of deposit
9,800

 

 

 

 
9,800

Commercial paper
12,129

 

 

 

 
12,129

Corporate debt securities
67,201

 
27

 
(40
)
 

 
67,188

Asset-backed securities
24,619

 
2

 
(13
)
 

 
24,608

Non-U.S. government agency securities
1,007

 

 
(2
)
 

 
1,005

Total:
$
128,774

 
$
33

 
$
(60
)
 
$

 
$
128,747

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

As of April 30, 2016, the stated maturities of the Company's available-for-sale securities are:
 
Amortized Cost
 
Fair Value
 
(in thousands)
Due in 1 year or less
$
83,453

 
$
83,466

Due in 2-5 years
48,432

 
48,451

Due in 6-10 years
59

 
59

Total
$
131,944

 
$
131,976

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

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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 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. 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 12 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 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Gain (loss) recorded in other income (expense), net
$
1,914

 
$
(235
)
 
$
(1,849
)
 
$
(2,993
)
The notional amounts in the table below for derivative instruments provide one measure of the transaction volume outstanding:

10

Table of Contents

 
As of April 30, 2016
 
As of October 31, 2015
 
(in thousands)
Total gross notional amount
$
719,816

 
$
781,752

Net fair value
$
(9,203
)
 
$
(3,819
)
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 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 April 30, 2016
 
 
 
Other current assets
$
5,239

 
$
45

Accrued liabilities
$
13,558

 
$
929

As of October 31, 2015
 
 
 
Other current assets
$
6,461

 
$
1

Accrued liabilities
$
10,141

 
$
140

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 
 April 30, 2016
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
(6,182
)
 
Revenue
 
$
(1,429
)
Foreign exchange contracts
Operating expenses
 
9,322

 
Operating expenses
 
(3,768
)
Total
 
 
$
3,140

 
 
 
$
(5,197
)
Three months ended 
 April 30, 2015
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
374

 
Revenue
 
$
26

Foreign exchange contracts
Operating expenses
 
(1,704
)
 
Operating expenses
 
(6,397
)
Total
 
 
$
(1,330
)
 
 
 
$
(6,371
)
Six months ended 
 April 30, 2016
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
(7,673
)
 
Revenue
 
$
(1,217
)
Foreign exchange contracts
Operating expenses
 
(1,945
)
 
Operating expenses
 
(7,696
)
Total
 
 
$
(9,618
)
 
 
 
$
(8,913
)
Six months ended 
 April 30, 2015
 
 
 
 
 
 
 
Foreign exchange contracts
Revenue
 
$
3,340

 
Revenue
 
$
2,406

Foreign exchange contracts
Operating expenses
 
(17,499
)
 
Operating expenses
 
(9,833
)
Total
 
 
$
(14,159
)
 
 
 
$
(7,427
)

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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 statement of operations
on derivatives
(ineffective
portion)(1)
 
Amount of gain (loss)
recognized in
statement of operations on
derivatives
(excluded from
effectiveness testing)(2)
 
(in thousands)
For the three months ended April 30, 2016
$
201

 
$
2,140

For the three months ended April 30, 2015
$
(40
)
 
$
1,234

For the six months ended April 30, 2016
$
455

 
$
3,541

For the six months ended April 30, 2015
$
700

 
$
2,306


(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.

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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 April 30, 2016:
 
 
 
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
$
308,004

 
$
308,004

 
$

 
$

Commercial paper
600

 

 
600

 

Certificates of deposit
4,901

 

 
4,901

 

U.S. government agency securities
3,399

 

 
3,399

 

Short-term investments:
 
 
 
 
 
 
 
U.S. government agency securities
11,612

 

 
11,612

 

Municipal bonds
1,402

 

 
1,402

 

Certificates of deposit
13,598

 

 
13,598

 

Commercial paper
12,010

 

 
12,010

 

Corporate debt securities
66,811

 

 
66,811

 

Asset-backed securities
20,589

 

 
20,589

 

Non-U.S. government agency securities
1,004

 

 
1,004

 

Other
4,950

 
4,950

 

 

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts
5,284

 

 
5,284

 

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
157,135

 
157,135

 

 

Total assets
$
611,299

 
$
470,089

 
$
141,210

 
$

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$
14,487

 
$

 
$
14,487

 
$

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan  liabilities
157,135

 
157,135

 

 

Total liabilities
$
171,622

 
$
157,135

 
$
14,487

 
$


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Table of Contents

Assets and liabilities measured at fair value on a recurring basis are summarized below as of October 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
$
233,839

 
$
233,839

 
$

 
$

Commercial paper
1,834

 

 
1,834

 

Certificates of deposit
3,500

 

 
3,500

 

Asset-backed securities
299

 

 
299

 

Short-term investments:
 
 
 
 
 
 
 
U.S. government agency securities
12,614

 

 
12,614

 

Municipal bonds
1,403

 

 
1,403

 

Certificates of deposit
9,800

 

 
9,800

 

Commercial paper
12,129

 

 
12,129

 

Corporate debt securities
67,188

 

 
67,188

 

Asset-backed securities
24,608

 

 
24,608

 

Non-U.S. government agency securities
1,005

 

 
1,005

 

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency derivative contracts
6,462

 

 
6,462

 

Other long-term assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
158,462

 
158,462

 

 

Total assets
$
533,143

 
$
392,301

 
$
140,842

 
$

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Foreign currency derivative contracts
$
10,281

 
$

 
$
10,281

 
$

Other long-term liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
158,462

 
158,462

 

 

Total liabilities
$
168,743

 
$
158,462

 
$
10,281

 
$


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 six months ended April 30, 2016 and 2015, respectively.
As of April 30, 2016, the fair value of the Company’s non-marketable securities was $8.7 million, of which $6.2 million and $2.5 million were accounted for under the cost method and equity method, respectively. As of

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Table of Contents

October 31, 2015, the fair value of non-marketable securities was $10.3 million, of which $6.6 million and $3.7 million were accounted for under the cost method and equity method, respectively.
Note 7. Liabilities and Restructuring Charges
During fiscal 2015, the Company recorded restructuring costs of $15.1 million which included a voluntary retirement program (VRP) and a minimal headcount reduction program. As of October 31, 2015, there was no outstanding balance in restructuring charges.
During the six months ended April 30, 2016, we recorded $3.0 million of restructuring charges due to employee severance and benefits. Payments of these restructuring charges are anticipated to be completed before the end of fiscal 2016.
Accounts payable and accrued liabilities consist of:
 
April 30,
2016
 
October 31,
2015
 
(in thousands)
Payroll and related benefits
$
198,378

 
$
315,078

Other accrued liabilities
56,729

 
60,545

Accounts payable
30,089

 
9,919

Total
$
285,196

 
$
385,542

Other long-term liabilities consist of:
 
April 30,
2016
 
October 31,
2015
 
(in thousands)
Deferred compensation liability
$
157,135

 
$
158,462

Other long-term liabilities
47,020

 
43,559

Total
$
204,155

 
$
202,021

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 April 30, 2016, the Company is in compliance with all financial covenants.
As of April 30, 2016, the Company had a $30.0 million outstanding balance under the Term Loan and a $220.0 million outstanding balance under the Revolver, all of which are considered short-term liabilities. As of October 31, 2015, the Company had a $45.0 million outstanding balance under the Term Loan and a $160.0 million outstanding balance under the Revolver, all of which are considered short-term liabilities. 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 April 30, 2016, 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.
Subsequent to the end of the quarter, the Company drew down an additional $125.0 million under the Revolver. The total outstanding balance of the Revolver as of May 24, 2016 is $335.0 million, net of repayments.

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Table of Contents

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.
Note 9. Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:
 
April 30,
2016
 
October 31,
2015
 
(in thousands)
Cumulative currency translation adjustments
$
(87,574
)
 
$
(90,508
)
Unrealized gain (loss) on derivative instruments, net of taxes
(15,520
)
 
(14,839
)
Unrealized gain (loss) on available-for-sale securities, net of taxes
31

 
(28
)
Total accumulated other comprehensive income (loss)
$
(103,063
)
 
$
(105,375
)
The effect of amounts reclassified out of each component of accumulated other comprehensive income (loss) into net income was as follows:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(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
$
(1,429
)
 
$
26

 
$
(1,217
)
 
$
2,406

Operating expenses
(3,768
)
 
(6,397
)
 
(7,696
)
 
(9,833
)
Gain (loss) on available-for-sale securities
 
 
 
 
 
 
 
Other income (expense)
$
13

 
5

 
10

 
$
17

Total reclassifications into net income
$
(5,184
)
 
$
(6,366
)
 
$
(8,903
)
 
$
(7,410
)
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 September 1, 2015. 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 April 30, 2016, $300.0 million remained available for further repurchases under the program.

In August 2015, the Company entered into an accelerated share repurchase agreement (the August 2015 ASR) to repurchase an aggregate of $100.0 million of the Company’s common stock. Pursuant to the August 2015 ASR, the Company made a prepayment of $100.0 million and received an initial share delivery of shares valued at $80.0 million. The remaining balance of $20.0 million was settled in the first quarter of fiscal 2016. Total shares purchased under the August 2015 ASR were approximately 2.1 million shares, at an average purchase price of $48.06 per share.


16

Table of Contents

In December 2015, the Company entered into two simultaneous accelerated share repurchase agreements (the December 2015 ASRs) to repurchase an aggregate of $200.0 million of the Company’s common stock. Pursuant to the December 2015 ASRs, the Company made a prepayment of $200.0 million and received initial share deliveries of shares valued at $160.0 million. The December 2015 ASRs expired on April 29, 2016 with $20.0 million settled in April 2016 and the final $20.0 million settled in May 2016. Total shares purchased under the December 2015 ASRs were approximately 4.5 million shares, at an average purchase price of $44.40 per share.

In May 2016, the Company entered into an accelerated share repurchase agreement (the May 2016 ASR) to repurchase an aggregate of $125.0 million of the Company’s common stock. Pursuant to the May 2016 ASR, the Company will make a prepayment of $125.0 million to receive initial share deliveries of shares valued at $100.0 million. The remaining balance of $25.0 million is anticipated to be settled on or before August 15, 2016, upon completion of the repurchase. Under the terms of the May 2016 ASR, the specific number of shares that the Company ultimately repurchases will be based on the volume-weighted average share price of the Company’s common stock during the repurchase period, less a discount.
Stock repurchase activities are as follow:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Total shares repurchased (1)
515

 

 
4,364

 
3,290

Total cost of the repurchased shares(1)
$
20,000

 
$

 
$
200,000

 
$
144,000

Reissuance of treasury stock
1,261

 
1,597

 
1,462

 
2,379

(1)
Does not include the final 517,410 shares and $20.0 million equity forward contract, respectively, from the December 2015 ASRs settled in May 2016.
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 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Cost of license
$
2,608

 
$
2,092

 
$
5,204

 
$
4,210

Cost of maintenance and service
563

 
485

 
1,142

 
1,026

Research and development expense
11,838

 
10,277

 
23,423

 
20,477

Sales and marketing expense
4,741

 
4,058

 
9,442

 
8,306

General and administrative expense
3,709

 
3,371

 
7,261

 
6,845

Stock compensation expense before taxes
23,459

 
20,283

 
46,472

 
40,864

Income tax benefit
(6,135
)
 
(4,667
)
 
(12,152
)
 
(9,403
)
Stock compensation expense after taxes
$
17,324

 
$
15,616

 
$
34,320

 
$
31,461

As of April 30, 2016, there was $141.1 million of unamortized share-based compensation expense, which is expected to be amortized over a weighted-average period of approximately 2.5 years.
The intrinsic values of equity awards exercised during the periods are as follows:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Intrinsic value of awards exercised
$
7,224

 
$
13,114

 
$
8,498

 
$
24,631


17

Table of Contents

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.
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 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
69,376

 
$
55,596

 
$
129,411

 
$
120,785

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares for basic net income per share
152,250

 
154,515

 
152,609

 
154,486

Dilutive effect of potential common shares from equity-based compensation
2,286

 
2,968

 
2,312

 
2,923

Weighted-average common shares for diluted net income per share
154,536

 
157,483

 
154,921

 
157,409

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.36

 
$
0.85

 
$
0.78

Diluted
$
0.45

 
$
0.35

 
$
0.84

 
$
0.77

Anti-dilutive employee stock-based awards excluded(1)
2,886

 
1,190

 
2,649

 
1,859


(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:
 

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Table of Contents

 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Revenue:
 
 
 
 
 
 
 
United States
$
297,388

 
$
286,113

 
$
572,318

 
$
563,700

Europe
73,112

 
75,025

 
145,047

 
146,908

Japan
58,535

 
53,242

 
111,781

 
114,094

Asia-Pacific and Other
175,970

 
142,824

 
344,463

 
274,545

Consolidated
$
605,005

 
$
557,204

 
$
1,173,609

 
$
1,099,247

Geographic revenue data for multi-region, multi-product transactions reflect internal allocations and are therefore subject to certain assumptions and the Company’s methodology.
The aggregate revenue derived from one customer and its subsidiaries through multiple agreements accounted for 14.5% and 12.3% of the Company’s unaudited condensed consolidated revenue in the three months ended April 30, 2016 and 2015, respectively, and accounted for 13.8% and 11.8% of the Company’s unaudited condensed consolidated revenue in the six months ended April 30, 2016 and 2015, respectively.

Note 14. Other Income (Expense), net
The following table presents the components of other income (expense), net:
 
Three Months Ended 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Interest income
$
889

 
$
552

 
$
1,469

 
$
1,700

Interest expense
(848
)
 
(804
)
 
(1,521
)
 
(1,457
)
Gain (loss) on assets related to executive deferred compensation plan
8,707

 
5,973

 
(687
)
 
5,276

Foreign currency exchange gain (loss)
(783
)
 
511

 
(202
)
 
4,205

Other, net
2,452

 
1,725

 
4,590

 
3,349

Total
$
10,417

 
$
7,957

 
$
3,649

 
$
13,073

Note 15. Taxes
Effective Tax Rate
The Company estimates its annual effective tax rate at the end of each fiscal quarter. The effective tax rate takes into account the Company's estimations of annual pre-tax income, the geographic mix of pre-tax income and 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 
 April 30,
 
Six Months Ended 
 April 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Income before income taxes
$
97,223

 
$
83,884

 
$
161,565

 
$
160,499

Provision (benefit) for income taxes
$
27,847

 
$
28,288

 
$
32,154

 
$
39,714

Effective tax rate
28.6
%
 
33.7
%
 
19.9
%
 
24.7
%
The Company’s effective tax rate for the three and six months ended April 30, 2016 is lower than the statutory federal income tax rate of 35% primarily due to lower taxes on certain earnings considered as indefinitely reinvested in foreign operations and U.S. federal and California research tax credits, partially offset by state taxes and the tax effect of non-deductible stock compensation and the integration of acquired technologies. The integration of acquired technologies represents the income tax effect resulting from the transfer of certain intangible assets among company-controlled entities.

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The Company's effective tax rate decreased in the three and six months ended April 30, 2016, as compared to the same periods in fiscal 2015, primarily due to the permanent reinstatement of the U.S. federal research tax credit and an amendment to its intercompany cost-sharing arrangements to exclude stock-based compensation expense, partially offset by an increase in the valuation allowance on deferred tax assets.
On December 18, 2015, the president signed into law the Protecting Americans from Tax Hikes Act of 2015 which permanently reinstated the research tax credit retroactive to January 1, 2015. As a result of the new legislation, the Company recognized a benefit in the first quarter of 2016 related to ten months of fiscal 2015 and two months of fiscal 2016 as well as a benefit to the annual effective tax rate for ten months of fiscal 2016.
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.  The U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations and the IRS has initiated an appeal of the Tax Court's opinion. As the final resolution with respect to historical cost-sharing of stock-based compensation, and the potential favorable benefits to the Company, is unclear, the Company is recording no impact at this time and will continue to monitor developments related to this opinion and the potential impact of those developments on the Company's prior fiscal years. Effective February 1, 2016, the Company amended its cost-sharing arrangement to exclude stock-based compensation expense on a prospective basis and has reflected the corresponding benefits in its effective annual tax rate.
The Company’s total gross unrecognized tax benefits as of April 30, 2016 are $112.1 million exclusive of interest and penalties. If the total gross unrecognized tax benefits as of April 30, 2016 were recognized in the future, approximately $109.2 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 12 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 $20 million.
During the first quarter of fiscal 2016, the Company early adopted Accounting Standards Update (ASU) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17) on a retrospective basis. As required by ASU 2015-17, all deferred tax assets and liabilities are classified as non-current in the Company's unaudited condensed consolidated balance sheets, which is a change from the Company's prior period presentations whereby certain of its deferred tax assets were classified as current and the remainder were classified as non-current. Upon adoption of ASU 2015-17, current deferred tax assets of $95.0 million in the Company's October 31, 2015 consolidated balance sheet were reclassified as non-current.

State Examinations
In the first quarter of fiscal 2016, the Company reached final settlement with the California Franchise Tax Board for fiscal 2011, 2010 and 2009. As a result of the settlement, the Company reduced its deferred tax assets by $4.9 million, recognized $10.3 million in unrecognized tax benefits, and increased its valuation allowance by $5.4 million.
Non-U.S. Examinations
In the second quarter of fiscal 2016, the Company agreed to settle certain transfer pricing issues with the Indian tax authorities for fiscal years 2010 to 2015. As a result of the settlement, the Company recognized income tax expense, net of foreign tax credits, of $2.4 million.
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.

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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. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customer (Topic 606), Identifying Performance Obligations and Licensing." This ASU finalizes the amendments to the guidance on the new revenue standard on the identification of performance obligations and accounting for licenses of intellectual property. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)," which supersedes the lease requirements in "Leases (Topic 840)." This ASU requires a lessee to recognize a right-of-use asset and a lease payment liability for most leases in the Consolidated Statement of Financial Position. This ASU also makes some changes to lessor accounting and aligns with the new revenue recognition guidance.  This ASU will be effective for fiscal 2020, including interim periods within that reporting period, and earlier adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-9, "Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting." This ASU simplifies certain aspects of accounting for stock-based payment transactions, including the accounting for income taxes, provides an option to recognize gross stock-based compensation expense with actual forfeitures recognized as they occur and modifies the treatment of statutory tax withholding requirements, as well as certain classifications in the statement of cash flows. This ASU will be effective for fiscal 2018, including interim periods within that reporting period, and earlier adoption is permitted if all provisions are adopted in the same period. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements and related disclosures.

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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, 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,” “can,” “should,” “anticipate,” “expect,” “intend,” “believe,” “estimate,” “project,” “continue,” or the negatives of such terms, and similar expressions 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 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, 2015, as filed with the SEC on December 14, 2015.
Overview
Business Summary
Synopsys, Inc. provides software, intellectual property, and services used by designers along the entire silicon to software spectrum, from engineers creating advanced semiconductors to software developers seeking to ensure the quality and security of their products. We are a global leader in supplying the electronic design automation (EDA) software that engineers use to design 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 offerings, which are sold primarily to semiconductor and electronics companies, 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 and security 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

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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-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 have expanded our total addressable market. As we continue to expand our product portfolio, for instance in hardware and IP products, and our total addressable market, 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 second quarter of fiscal 2016, compared to the same period of fiscal 2015:
Revenues were $605.0 million, an increase of $47.8 million, or 9%, primarily driven by increases in hardware revenue and license revenue from arrangements booked in prior periods and to a lesser extent from prior-year acquisitions.
Total costs and operating expenses were $518.2 million, an increase of $36.9 million, or 8%, primarily due to increases in headcount, including from acquisitions and related costs. 
Our cash, cash equivalents and short-term investments were $959.9 million as of April 30, 2016, of which 14% was in the U.S. 
Our net income for the period ended April 30, 2016 increased by $13.8 million, or 25%.
We continued to derive more than 90% of our 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 business combinations;
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, 2015, filed with the SEC on December 14, 2015.

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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 professional service revenue consists of maintenance fees associated with perpetual and term licenses and professional services fees. Hardware revenue consists of sales 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 is typically three years, but varies from quarter to quarter due to the nature and timing of the arrangements entered during the quarter. For the three months ended April 30, 2016 and 2015, the weighted average license term was 2.3 and 2.5 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.

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Revenue on hardware product orders is generally recognized in full at the time the product is shipped and when the title is transferred.
Contingent revenue is recognized if and when the event that removes the contingency 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.
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 from 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 12 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
 
April 30,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
605.0

 
$
557.2

 
$
47.8

 
9
%
Six months ended
$
1,173.6

 
$
1,099.2

 
$
74.4

 
7
%
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 revenue due to factors such as the timing of IP consulting projects and royalties, certain contracts where revenue is recognized when customer installment payments are due, and volatility in hardware sales.
The increase in total revenue for the three and six months ended April 30, 2016 compared to the same periods in fiscal 2015 was primarily attributable to an increase in time-based license revenue from arrangements booked in prior periods, higher hardware sales and contributions from acquisitions, partially offset by a decrease in professional services revenue.

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Time-Based License Revenue
 
April 30,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
484.2

 
$
447.8

 
$
36.4

 
8
%
Percentage of total revenue
80
%
 
80
%
 

 

Six months ended
$
948.5

 
$
878.9

 
$
69.6

 
8
%
Percentage of total revenue
81
%
 
80
%
 
 
 
 
The increase in time-based license revenue for the three and six months ended April 30, 2016 compared to the same periods in fiscal 2015 was primarily attributable to an increase in TSL license revenue due to arrangements booked in prior periods and, to a lesser extent, contributions from acquisitions.
Upfront License Revenue
 
April 30,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
$
58.2

 
$
44.3

 
$
13.9

 
31
%
Percentage of total revenue
10
%
 
8
%
 

 

Six months ended
$
101.6

 
$
90.8

 
$
10.8

 
12
%
Percentage of total revenue
9
%
 
8
%
 

 

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 six months ended April 30, 2016 compared to the same periods in fiscal 2015 was primarily attributable to an increase in the sale of hardware products driven by timing of customer requirements.
As our sales of hardware products grow, upfront license revenue may increase, but we expect it to remain consistent with our business model, in which approximately 90% of our total revenue is attributable to time-based license revenue and maintenance and service revenue.

Maintenance and Service Revenue
 
April 30,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
(dollars in millions)
Three months ended
 
 
 
 
 
 
 
Maintenance revenue
$
18.3

 
$
16.5

 
$
1.8

 
11
 %
Professional services and other revenue
44.3

 
48.5

 
(4.2
)
 
(9
)%
Total maintenance and service revenue
$
62.6

 
$
65.0

 
$
(2.4
)
 
(4
)%
Percentage of total revenue
10
%
 
12
%
 
 
 
 
Six months ended
 
 
 
 
 
 
 
Maintenance revenue
$
36.3