filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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, which involve risks, uncertainties and other factors that could cause our actual results, time frames or achievements to differ materially from those expressed or implied in such forward-looking statements. Readers are urged to carefully review and consider the various disclosures regarding these risks and uncertainties made in this Quarterly Report on Form 10-Q, including those identified below in Part II, Item 1A, Risk Factors, and in other documents we file from time to time with the Securities and Exchange Commission (SEC). Forward-looking statements include any statements that are not statements of historical fact and include, but are not limited to, statements concerning strategies related to our products and technology; business and market outlook, opportunities and strategies; customer demand and market expansion; our planned product releases and capabilities; industry growth rates; software trends; planned acquisitions and stock repurchases; our expected tax rate; the expected impact of U.S. and foreign government actions and regulatory changes on our financial results; and the continued impact of the COVID-19 pandemic. Forward-looking statements may be identified by words including, but not limited to, “may,” “will,” “could,” “would,” “can,” “should,” “anticipate,” “expect,” “intend,” “believe,” “estimate,” “project,” “continue,” “forecast,” "likely," "potential," "seek," or the negatives of such terms and similar expressions. 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, Inc. (Synopsys, we, our or us) or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.
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 Quarterly Report on Form 10-Q 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, 2021, as filed with the SEC on December 13, 2021 (our Annual Report).
Overview
Business Summary
Synopsys provides products and services used across the entire Silicon to Software spectrum, from engineers creating advanced semiconductors to product teams developing advanced electronic systems to software developers seeking to ensure the security and quality of their code. We are a global leader in electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. We also offer semiconductor intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. We provide software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. We also provide technical services and support to help our customers develop advanced chips and electronic systems. These products and services are part of our Semiconductor & System Design segment.
We are also a leading provider of software tools and services that improve the security, quality and compliance of software in a wide variety of industries, including electronics, financial services, automotive, medicine, energy and industrials. These tools and services are part of our Software Integrity segment.
Our EDA and IP customers are generally semiconductor and electronics systems companies. Our solutions help these companies overcome the challenges of developing increasingly advanced electronics products while also helping them reduce their design and manufacturing costs. While our products are an important part of our customers’ development process, our sales could be affected based on their research and development budgets, and our customers’ spending decisions may be affected by their business outlook and willingness to invest in new and increasingly complex chip designs.
Our Software Integrity business delivers products and services that enable software developers to test their code—while it is being written—for known security vulnerabilities and quality defects, as well as testing for open source security vulnerabilities and license compliance. Our Software Integrity customers are software developers across many industries, including, but also well beyond, the semiconductor and systems industries. Our Software Integrity products and services form a platform that helps our customers build security into the software development lifecycle and across the entire cyber supply chain.
We have consistently grown our revenue since 2005, despite periods of global economic uncertainty. We achieved these results because of our solid execution, leading technologies and strong customer relationships, and because we generally recognize our revenue for software licenses over the arrangement period, which typically approximates three years. See Note 2 of the Notes to Consolidated Financial Statements in our Annual Report for a discussion on our revenue recognition policy*.* The revenue we recognize in a particular period generally results from selling efforts in prior periods rather than the current period. As a result, decreases as well as increases in customer spending do not immediately affect our revenues in a significant way.
Our growth strategy is based on maintaining and building on our leadership in our EDA products, expanding and proliferating our IP offerings, driving growth in the software security and quality market and continuing to expand our product portfolio and our total addressable market. Our revenue growth from period to period is expected to vary based on the mix of our time-based and upfront products. Based on our leading technologies, customer relationships, business model, diligent expense management, and acquisition strategy, we believe that we will continue to execute our strategies successfully.
COVID-19 Pandemic and Other Trends
While the COVID-19 pandemic has changed the physical working environment of the majority of our workforce to working from home, it otherwise caused only minor disruptions to our business operations with a limited impact on our operating results thus far. Given the unpredictable nature of the COVID-19 pandemic’s impact on the global economy, our historical results may not be an indication of future performance. The extent to which the COVID-19 pandemic impacts our business operations in future periods will depend on multiple uncertain factors, including the duration and scope of the pandemic, its overall negative impact on the global economy generally and the semiconductor and electronics industries specifically, continued responses by governments and businesses to COVID-19 and its variants, and acceptance and effectiveness of vaccines. We have not identified trends that we expect will materially impact our future operating results at this time. As we generally recognize our revenue for software licenses over the arrangement period, any potential impact related to COVID-19 may be delayed.
We have not observed material changes in the design activity of customers. We have not received any significant requests from our customers to either delay payments or modify arrangements due to COVID-19. However, this situation could change in future periods and the extent that these requests may impact our business is uncertain. We have also experienced minor disruptions in our hardware supply chain, including those related to the global semiconductor shortage. These minor disruptions have had an immaterial effect on certain hardware components in our IP business, which we have been able to address with minimal impact to our business operations to date. Further, although we have not experienced any material adverse effects on our business due to increasing inflation, it has raised operating costs for many businesses and, in the future, could impact demand or pricing of our products, foreign exchange rates or employee wages. We are actively monitoring the effects these disruptions and increasing inflation could have on the semiconductor and electronics industries as a whole.
We will continue to consider the potential impact of the COVID-19 pandemic, global semiconductor shortage and increasing inflation on our business operations. Although no material impairment or other material adverse effects have been identified to date related to such factors, there is substantial uncertainty in the nature and degree of their continued effects over time. That uncertainty could affect management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known.
See Part II, Item 1A, Risk Factors for further discussion of the possible impact of the COVID-19 pandemic, global semiconductor shortage and increasing inflation on our business, operations and financial condition.
Business Segments
Semiconductor & System Design. This segment includes our advanced silicon design, verification products and services and semiconductor IP portfolio, which encompasses products and services that serve companies primarily in the semiconductor and electronics industries. EDA includes digital, custom and field programmable gate array (FPGA) IC design software, verification products and manufacturing software products. Designers use these products to automate the highly complex IC design process and to reduce defects that could lead to expensive design or manufacturing re-spins or suboptimal end products. For IP, we are a leading provider of high-quality, silicon-proven IP solutions for system-on-chips (SoCs). This includes IP that has been optimized to address specific application requirements for the mobile, automotive, digital home, internet of things and cloud computing markets, enabling designers to quickly develop SoCs in these areas.
Software Integrity. This segment includes a broad portfolio of products and services to intelligently address software risks across the customer’s portfolio and at all stages of the application lifecycle. The testing tools, services, and programs enable our customers to manage open source license compliance and detect, prioritize, and remediate security vulnerabilities and defects across their entire software development lifecycle. Our offerings include security and quality testing products, managed services, programs and professional services, and training.
Fiscal Year End
Our fiscal year ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, we have a 53-week year. When a 53-week year occurs, we include the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2022 and 2021 are 52-week years ending on October 29, 2022 and October 30, 2021, respectively.
Our results of operations for the three and nine months of fiscal 2022 and 2021 ended on July 30, 2022 and July 31, 2021, respectively. For presentation purposes, this Form 10-Q refers to the closest calendar month end.
Russia-Ukraine Conflict
Due to the ongoing conflict between Russia and Ukraine and the related sanctions and other penalties imposed on Russia and Belarus by the United States, the European Union, the United Kingdom and other countries, we suspended all Synopsys business operations in Russia commencing in the second quarter of fiscal 2022. We do not have operations or employees in Ukraine. The suspension of our business operations in Russia has not had a material impact on our business, financial condition, or results of operations as our operations in Russia and our sales to customers in Russia and Belarus do not constitute a material portion of our business. Further, unless and until the U.S. government lifts its sanctions on Russia and Belarus, which are restricting the export of a broad range of U.S. technologies to those countries, we will continue to be unable to ship such technologies or provide support to anyone in Russia or Belarus. We are actively monitoring the Russia-Ukraine conflict and the potential impact it could have on our business, employees and our ability to sell our products and services to our customers. See Part II, Item 1A, Risk Factors for further discussion of the possible impact of the Russia-Ukraine Conflict on our business, operations and financial condition.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial results under Results of Operations below are based on our unaudited condensed consolidated financial statements, which we have prepared in accordance with United States Generally Accepted Accounting Principles (U.S. 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. See Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information on our significant accounting policies.
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:
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Revenue recognition;
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Valuation of business combinations; and
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Income taxes.
See Critical Accounting Policies and Estimates in our Annual Report for further information.
Results of Operations
Financial Performance Summary
In the third quarter of fiscal 2022 compared to the same period of fiscal 2021, our financial performance reflected the following:
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Revenues were $1,247.8 million, an increase of $190.6 million or approximately 18%, primarily due to higher revenue resulting from growth across all product groups and geographies.
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Total cost of revenue and operating expenses were $1,013.8 million, an increase of $158.6 million or 19%, primarily due to increases of $112.4 million in employee-related costs resulting from headcount increases through organic growth and acquisitions.
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Operating income was $233.9 million, an increase of $32.0 million or 16% as revenue growth exceeded the growth of costs and expenses.
Revenue
Our revenues are generated from two business segments: the Semiconductor & System Design segment and the Software Integrity segment. See Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information about our reportable segments and revenue by geographic regions.
Further disaggregation of the revenues into various products and services within these two segments is summarized as follows:
Semiconductor & System Design Segment
This segment is comprised of the following:
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EDA software includes digital, custom and FPGA IC design software, verification products and obligations to provide unspecified updates and support services. EDA products and services are typically sold through Time-based Subscription License (TSL) arrangements that grant customers the right to access and use all of the licensed products at the outset of an arrangement and software updates are generally made available throughout the entire term of the arrangement. The duration of our TSL contracts is generally 3 years, though it may vary for specific arrangements. We have concluded that the software licenses in TSL contracts are not distinct from the obligation to provide unspecified software updates to the licensed software throughout the license term, because the multiple software licenses and support represent inputs to a single, combined offering, and timely, relevant software updates are integral to maintaining the utility of the software licenses. We recognize revenue for the combined performance obligation under TSL contracts ratably over the term of the license.
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IP & System Integration includes our DesignWare® IP portfolio and system-level products and services. These arrangements generally have two performance obligations which consist of transferring of the licensed IP and providing related support, which includes rights to technical support and software updates that are provided over the support term and are transferred to the customer over time. Revenue allocated to the IP licenses is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support is recognized over the support term. Royalties are recognized as revenue in the quarter in which the applicable customer sells its products that incorporate our IP. Payments for IP contracts are generally received upon delivery of the IP. Revenue related to the customization of certain IP is recognized as “Professional Services.”
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In the case of arrangements involving the sale of hardware products, we generally have two performance obligations. The first performance obligation is to transfer the hardware product, which includes software integral to the functionality of the hardware product. The second performance obligation is to provide maintenance on the hardware and its embedded software, which includes rights to technical support, hardware repairs and software updates that are all provided over the same term and have the same time-based pattern of transfer to the customer. The portion of the transaction price allocated to the hardware product is generally recognized as revenue at the time of shipment because the customer obtains control of the product at that point in time. We have concluded that control generally transfers at that point in time because the customer has the ability to direct the use of the asset and an obligation to pay for the hardware. The portion of the transaction price allocated to the maintenance obligation is recognized as revenue ratably over the maintenance term.
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Revenue from Professional Service contracts is recognized over time, generally using costs incurred or hours expended to measure progress. We have a history of reasonably estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.
Software Integrity Segment
- We sell Software Integrity products in arrangements that provide customers the right to software licenses, maintenance updates and technical support. Over the term of these arrangements, the customer expects us to provide integral maintenance updates to the software licenses, which help customers protect their own software from new critical quality defects and potential security vulnerabilities. The licenses and maintenance updates serve together to fulfill our commitment to the customer as both work together to provide functionality to the customer and represent a combined performance obligation. We recognize revenue for the combined performance obligation over the term of the arrangement.
Our customer arrangements can involve multiple products and various license rights, and our customers negotiate with us over many aspects of these arrangements. For example, they generally request 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 highly competitive markets. Customers generally negotiate the total value of the arrangement rather than just unit pricing or volumes.
Total Revenue
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Semiconductor & System Design Segment | $ | 1,129.5 | $ | 959.1 | $ | 170.4 | 18 | % | |||||||||||||||
| Software Integrity Segment | 118.3 | 98.0 | 20.3 | 21 | % | ||||||||||||||||||
| Total | $ | 1,247.8 | $ | 1,057.1 | $ | 190.7 | 18 | % | |||||||||||||||
| Nine months ended | |||||||||||||||||||||||
| Semiconductor & System Design Segment | $ | 3,458.5 | $ | 2,768.0 | $ | 690.5 | 25 | % | |||||||||||||||
| Software Integrity Segment | 338.8 | 283.8 | 55.0 | 19 | % | ||||||||||||||||||
| Total | $ | 3,797.3 | $ | 3,051.8 | $ | 745.5 | 24 | % |
Our revenues are subject to fluctuations, primarily due to customer requirements including the timing and value of contract renewals. For example, we experience fluctuations in our revenues due to factors such as the timing of IP product sales, consulting projects, Flexible Spending Account (FSA) drawdowns, royalties, and hardware sales. As revenues from IP products sales and hardware sales are recognized upfront, customer demand and timing requirements for such IP products and hardware could result in increased variability of our total revenues.
Contracted but unsatisfied or partially unsatisfied performance obligations as of July 31, 2022 were $7.1 billion. For more information regarding our revenue as of July 31, 2022, including our contract balances as of such date, see Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.
The increase in total revenues for the three and nine months ended July 31, 2022 compared to the same periods in fiscal 2021 was primarily due to the continued organic growth of our business in all product groups and geographies.
For a discussion of revenue by geographic areas, see Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements.
Time-Based Products Revenue
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 754.3 | $ | 665.6 | $ | 88.7 | 13 | % | |||||||||||||||
| Percentage of total revenue | 60 | % | 63 | % | |||||||||||||||||||
| Nine months ended | $ | 2,185.6 | $ | 1,945.6 | $ | 240.0 | 12 | % | |||||||||||||||
| Percentage of total revenue | 57 | % | 64 | % |
The increase in time-based products revenue for the three and nine months ended July 31, 2022 compared to the same periods in fiscal 2021 was primarily attributable to an increase in TSL license revenue and higher renewals from arrangements booked in prior periods.
Upfront Products Revenue
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 268.6 | $ | 203.3 | $ | 65.3 | 32 | % | |||||||||||||||
| Percentage of total revenue | 22 | % | 19 | % | |||||||||||||||||||
| Nine months ended | $ | 973.5 | $ | 586.8 | $ | 386.7 | 66 | % | |||||||||||||||
| Percentage of total revenue | 26 | % | 19 | % |
Changes in upfront products revenue are generally attributable to normal fluctuations in the extent and timing of customer requirements, which can drive the amount of upfront orders and revenue in any particular period.
The increase in upfront products revenue for the three and nine months ended July 31, 2022 compared to the same periods in fiscal 2021 was primarily due to an increase in the sale of IP products and hardware products driven by higher demand from customers.
Upfront products revenue as a percentage of total revenue will likely fluctuate based on the timing of IP products and hardware sales. Such fluctuations will continue to be impacted by the timing of shipments or FSA drawdowns due to customer requirements.
Maintenance and Service Revenue
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Maintenance revenue | $ | 74.4 | $ | 61.0 | $ | 13.4 | 22 | % | |||||||||||||||
| Professional services and other revenue | 150.5 | 127.3 | 23.2 | 18 | % | ||||||||||||||||||
| Total | $ | 224.9 | $ | 188.3 | $ | 36.6 | 19 | % | |||||||||||||||
| Percentage of total revenue | 18 | % | 18 | % | |||||||||||||||||||
| Nine months ended | |||||||||||||||||||||||
| Maintenance revenue | $ | 212.5 | $ | 172.6 | $ | 39.9 | 23 | % | |||||||||||||||
| Professional services and other revenue | 425.6 | 346.7 | 78.9 | 23 | % | ||||||||||||||||||
| Total maintenance and service revenue | $ | 638.1 | $ | 519.3 | $ | 118.8 | 23 | % | |||||||||||||||
| Percentage of total revenue | 17 | % | 17 | % |
The increase in maintenance revenue for the three and nine months ended July 31, 2022 compared to the same periods in fiscal 2021 was primarily due to an increase in the volume of hardware and IP arrangements that include maintenance.
The increase in professional services and other revenue for the three and nine months ended July 31, 2022 compared to the same periods in fiscal 2021 was primarily due to an increase in the volume of IP consulting projects.
Cost of Revenue
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Cost of products revenue | $ | 164.1 | $ | 127.6 | $ | 36.5 | 29 | % | |||||||||||||||
| Cost of maintenance and service revenue | 87.8 | 65.6 | 22.2 | 34 | % | ||||||||||||||||||
| Amortization of intangible assets | 19.3 | 11.9 | 7.4 | 62 | % | ||||||||||||||||||
| Total | $ | 271.2 | $ | 205.1 | $ | 66.1 | 32 | % | |||||||||||||||
| Percentage of total revenue | 22 | % | 19 | % | |||||||||||||||||||
| Nine months ended | |||||||||||||||||||||||
| Cost of products revenue | $ | 480.2 | $ | 389.7 | $ | 90.5 | 23 | % | |||||||||||||||
| Cost of maintenance and service revenue | 253.7 | 202.2 | 51.5 | 25 | % | ||||||||||||||||||
| Amortization of intangible assets | 47.1 | 35.2 | 11.9 | 34 | % | ||||||||||||||||||
| Total | $ | 781.0 | $ | 627.1 | $ | 153.9 | 25 | % | |||||||||||||||
| Percentage of total revenue | 21 | % | 21 | % |
We divide cost of revenue into three categories: cost of products 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 products revenue associated with internal functions providing license delivery and post-customer contract support services. We then allocate group costs between cost of products revenue and cost of maintenance and service revenue based on products and maintenance and service revenue reported.
Cost of products revenue. Cost of products revenue includes costs related to products sold and software licensed, hardware related direct costs, allocated operating costs related to product support and distribution costs, royalties paid to third-party vendors, and the amortization of capitalized software development costs.
Cost of maintenance and service revenue. Cost of maintenance and service revenue includes costs to deliver our maintenance and consulting services, such as hotline and on-site support, production services and documentation of maintenance updates.
Amortization of intangible assets. Amortization of intangible assets included within cost of revenue consists of the amortization of core/developed technology and certain contract rights intangible.
The increase in cost of revenue for the three months ended July 31, 2022 compared to the same period in fiscal 2021, was primarily due to increases of $30.9 million in personnel-related costs as a result of headcount increases from hiring and acquisitions, $13.6 million in hardware-related costs, $7.4 million in amortization of technology-related intangible assets, $7.1 million in costs to fulfill IP consulting arrangements, and $4.9 million in facility expenses. These increases were partially offset by a decrease of $1.1 million in the fair value of our executive deferred compensation plan assets.
The increase in cost of revenue for the nine months ended July 31, 2022 compared to the same period in fiscal 2021, was primarily due to increases of $78.3 million in personnel-related costs as a result of headcount increases from hiring and acquisitions, $48.8 million in hardware-related costs, $11.9 million in amortization of technology-related intangible assets, $9.4 million in costs to fulfill IP consulting arrangements, and $8.3 million in facility expenses. These increases were partially offset by a decrease of $9.4 million in the fair value of our executive deferred compensation plan assets.
Changes in other cost of revenue categories for the above-mentioned periods were not individually material.
Operating Expenses
Research and Development
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 444.8 | $ | 371.1 | $ | 73.7 | 20 | % | |||||||||||||||
| Percentage of total revenue | 36 | % | 35 | % | |||||||||||||||||||
| Nine months ended | $ | 1,218.8 | $ | 1,091.0 | $ | 127.8 | 12 | % | |||||||||||||||
| Percentage of total revenue | 32 | % | 36 | % |
The increase in research and development expenses for the three months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to higher personnel-related costs of $58.4 million as a result of headcount increases from hiring and acquisitions as we continue to expand and enhance our product portfolio, increases of $9.3 million in facility expenses, and $3.3 million in consultant and contractor costs. These increases were partially offset by a decrease of $6.8 million in the fair value of our executive deferred compensation plan assets.
The increase in research and development expenses for the nine months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to higher personnel-related costs of $156.6 million as a result of headcount increases from hiring and acquisitions as we continue to expand and enhance our product portfolio, increases of $13.5 million in facility expenses, and $11.3 million in consultant and contractor costs. These increases were partially offset by a decrease of $68.9 million in the fair value of our executive deferred compensation plan assets.
Changes in other research and development expense categories for the above-mentioned periods were not individually material.
Sales and Marketing
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 199.2 | $ | 171.4 | $ | 27.8 | 16 | % | |||||||||||||||
| Percentage of total revenue | 16 | % | 16 | % | |||||||||||||||||||
| Nine months ended | $ | 571.3 | $ | 514.8 | $ | 56.5 | 11 | % | |||||||||||||||
| Percentage of total revenue | 15 | % | 17 | % |
The increase in sales and marketing expenses for the three months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to increases of $21.1 million in personnel-related costs due to headcount increases from hiring and higher sales commissions, $3.5 million in travel and marketing expenses, and $2.3 million in facility expenses. These increases were partially offset by a decrease of $2.4 million in the fair value of our executive deferred compensation plan assets.
The increase in sales and marketing expenses for the nine months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to increases of $60.2 million in personnel-related costs due to headcount increases from hiring and higher sales commissions, $7.2 million in travel and marketing expenses, and $2.3 million in facility expenses. These increases were partially offset by a decrease of $20.8 million in the fair value of our executive deferred compensation plan assets.
Changes in other sales and marketing expense categories for the above-mentioned periods were not individually material.
General and Administrative
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 91.5 | $ | 83.8 | $ | 7.7 | 9 | % | |||||||||||||||
| Percentage of total revenue | 7 | % | 8 | % | |||||||||||||||||||
| Nine months ended | $ | 246.4 | $ | 234.0 | $ | 12.4 | 5 | % | |||||||||||||||
| Percentage of total revenue | 6 | % | 8 | % |
The increase in general and administrative expenses for the three months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to increases of $8.9 million in legal, consulting and other professional fees, $2.0 million in personnel-related costs due to headcount increases from hiring, and $1.2 million in maintenance and depreciation expenses. These increases were partially offset by a decrease of $1.3 million in the fair value of our executive deferred compensation plan assets.
The increase in general and administrative expenses for the nine months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to increases of $23.1 million in legal, consulting and other professional fees, $12.9 million in maintenance and depreciation expenses, and $8.1 million in personnel-related costs due to headcount increases from hiring. These increases were partially offset by bad debt recoveries of $15.9 million and a decrease of $13.4 million in the fair value of our executive deferred compensation plan assets.
Changes in other general and administrative expense categories for the above-mentioned periods were not individually material.
Amortization of Intangible Assets
Amortization of intangible assets included within operating expenses consists of the amortization of trademarks, trade names and customer relationships related to acquisitions completed in prior years.
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | 7.1 | 8.6 | (1.5) | (17) | % | ||||||||||||||||||
| Percentage of total revenue | 1 | % | 1 | % | |||||||||||||||||||
| Nine months ended | 23.0 | 25.3 | (2.3) | (9) | % | ||||||||||||||||||
| Percentage of total revenue | 1 | % | 1 | % |
The decrease in amortization of intangible assets for the three and nine months ended July 31, 2022 compared to the same periods in fiscal 2021 was primarily due to certain intangible assets becoming fully amortized, partially offset by amortization expenses related to acquired intangible assets during the three and nine months ended July 31, 2022.
Restructuring Charges
In the third quarter of fiscal 2021, our management approved, committed and initiated a restructuring plan (the 2021 Plan) as part of a business reorganization. Total charges under the Plan consisting primarily of severance, retirement benefits, and lease abandonment costs, were $45.5 million, of which $12.1 million was incurred during the nine months ended July 31, 2022. The 2021 Plan was substantially completed in the first quarter of fiscal 2022.
See Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.
Other Income (Expense), Net
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Interest income | $ | 2.7 | $ | 0.7 | $ | 2.0 | 286 | % | |||||||||||||||
| Interest expense | (0.4) | (0.8) | 0.4 | (50) | % | ||||||||||||||||||
| Gains (losses) on assets related to executive deferred compensation plan | (1.1) | 10.5 | (11.6) | (110) | % | ||||||||||||||||||
| Foreign currency exchange gains (losses) | (0.4) | 2.8 | (3.2) | (114) | % | ||||||||||||||||||
| Other, net | 1.6 | (1.8) | 3.4 | (189) | % | ||||||||||||||||||
| Total | $ | 2.4 | $ | 11.4 | $ | (9.0) | (79) | % | |||||||||||||||
| Nine months ended | |||||||||||||||||||||||
| Interest income | $ | 4.9 | $ | 1.4 | $ | 3.5 | 250 | % | |||||||||||||||
| Interest expense | (1.3) | (2.3) | 1.0 | (43) | % | ||||||||||||||||||
| Gains (losses) on assets related to executive deferred compensation plan | (50.0) | 62.7 | (112.7) | (180) | % | ||||||||||||||||||
| Foreign currency exchange gains (losses) | 3.5 | 5.3 | (1.8) | (34) | % | ||||||||||||||||||
| Other, net | 1.6 | (5.2) | 6.8 | (131) | % | ||||||||||||||||||
| Total | $ | (41.3) | $ | 61.9 | $ | (103.2) | (167) | % |
The decrease in other income (expense) for the three and nine months ended July 31, 2022 as compared to the same periods in fiscal 2021 was primarily due to the decrease in the fair value of our executive deferred compensation plan assets.
Segment Operating Results
We do not allocate certain operating expenses managed at a consolidated level to our reportable segments. These unallocated expenses consist primarily of stock-based compensation expense, amortization of intangible assets, restructuring, and acquisition-related costs. See Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information.
Semiconductor & System Design Segment
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 380.8 | $ | 328.7 | $ | 52.1 | 16 | % | |||||||||||||||
| Adjusted operating margin | 34 | % | 34 | % | — | % | — | % | |||||||||||||||
| Nine months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 1,285.4 | $ | 916.4 | $ | 369.0 | 40 | % | |||||||||||||||
| Adjusted operating margin | 37 | % | 33 | % | 4 | % | 12 | % |
The increase in adjusted operating income for the three and nine months ended July 31, 2022 compared to the same periods in fiscal 2021 was primarily due to an increase in revenue from arrangements booked in prior periods.
Software Integrity Segment
| July 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 11.3 | $ | 8.7 | $ | 2.6 | 30 | % | |||||||||||||||
| Adjusted operating margin | 10 | % | 9 | % | 1 | % | 11 | % | |||||||||||||||
| Nine months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 36.3 | $ | 25.0 | $ | 11.3 | 45 | % | |||||||||||||||
| Adjusted operating margin | 11 | % | 9 | % | 2 | % | 22 | % |
The increase in the adjusted operating income for the three and nine months ended July 31, 2022 compared to the same periods in fiscal 2021 was primarily due to an increase in revenue from arrangements booked in prior periods.
Income Taxes
Our effective tax rates for the three months and nine months ended July 31, 2022 are consistent with the same periods in fiscal 2021.
See Note 18 of the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
Our principal sources of liquidity are funds generated from our business operations and funds that may be drawn down under our revolving credit and term loan facilities.
As of July 31, 2022, we held $1,531.2 million in cash, cash equivalents and short-term investments. Our cash equivalents consisted primarily of taxable money market mutual funds, time deposits and highly liquid investments with maturities of three months or less. Our short-term investments include U.S. government and municipal obligations, investment-grade available-for-sale debt and asset backed securities. We believe that the overall credit quality of our portfolio is strong, with our global excess cash, and our cash equivalents, invested in banks and securities with a weighted-average credit rating exceeding AA.
As of July 31, 2022, approximately $780.0 million of our cash and cash equivalents were domiciled in various foreign jurisdictions. We have provided for foreign withholding taxes on the undistributed earnings of certain of our foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries.
We believe that our existing cash, cash equivalents and short-term investments and sources of liquidity will be sufficient to satisfy our cash requirements and capital return program over the next 12 months and beyond. Our future cash requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, and the timing and extent of our spending to support our research and development efforts. We also may invest in or acquire businesses, applications or technologies, or may further expand our board-authorized stock repurchase program, which may require the use of significant cash resources and/or additional financing.
During the nine months ended July 31, 2022, there were no significant changes to our material cash requirements, including contractual and other obligations, as presented in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report.
The following sections discuss changes in our unaudited condensed consolidated statements of cash flows and other commitments of our liquidity and capital resources during the nine months ended July 31, 2022.
Cash Flows
| Nine Months Ended July 31, | |||||||||||||||||
| 2022 | 2021 | $ Change | |||||||||||||||
| (dollars in millions) | |||||||||||||||||
| Cash provided by operating activities | $ | 1,345.4 | $ | 1,122.1 | $ | 223.3 | |||||||||||
| Cash used in investing activities | (531.3) | (385.9) | (145.4) | ||||||||||||||
| Cash used in financing activities | (825.2) | (589.4) | (235.8) |
Cash Provided by Operating Activities
We expect cash from our operating activities to fluctuate as a result of a number of factors, including the timing of our billings and collections, our operating results, and the timing and amount of tax and other liability payments. Cash provided by our operations is dependent primarily upon the payment terms of our license agreements. We generally receive cash from upfront arrangements much sooner than from time-based products revenue, in which the license fee is typically paid either quarterly or annually over the term of the license.
The increase in cash provided by operating activities for the nine months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to higher net income and higher AR collection, partially offset by timing of customer billings and higher disbursements for operations, including vendor and tax payments.
Cash Used in Investing Activities
The increase in cash used in investing activities for the nine months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to higher cash paid for acquisitions of $252.3 million and higher purchases of property and equipment of $36.0 million, partially offset by lower purchases of short-term investments of $72.8 million and higher proceeds from the sales and maturities of short-term investments of $69.7 million.
Cash Used in Financing Activities
The increase in cash used in financing activities for the nine months ended July 31, 2022 compared to the same period in fiscal 2021 was primarily due to higher stock repurchases of $184.2 million and higher income taxes paid for net share settlements of $44.8 million.
Credit and Term Loan Facilities
On November 28, 2016, we entered into an amended and restated credit agreement with several lenders (as amended and restated, the Credit Agreement) providing for (i) a $650.0 million senior unsecured revolving credit facility (the Revolver) and (ii) a $150.0 million senior unsecured term loan facility (the Term Loan). On January 22, 2021, the Credit Agreement was amended (Credit Agreement) to extend the termination date of the existing $650 million senior unsecured revolving credit facility from November 28, 2021 to January 22, 2024, which may be further extended at our option. Further, the Credit Agreement was also amended to provide an uncommitted incremental loan facility of up to $150.0 million in the aggregate principal amount. Our outstanding term loan borrowings under the previous credit agreement carried over under the Credit Agreement. The outstanding term loans under the Credit Agreement continued to amortize in quarterly installments with the balance repaid in full on November 26, 2021. There was no outstanding balance under the Revolver and the Term Loan as of July 31, 2022.
In July 2018, we entered into a 12-year 220.0 million Renminbi (approximately $33.0 million) credit agreement with a lender in China to support our facilities expansion. Borrowings bear interest at a floating rate based on the 5 year Loan Prime Rate plus 0.74%. As of July 31, 2022, we had $22.0 million outstanding balance under the agreement.
See Note 10 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.
Stock Repurchase Program
In December 2021, our Board approved a stock repurchase program (the Program) with authorization to purchase up to $1.0 billion of our common stock.
In May 2022, we entered into an accelerated stock repurchase agreement (the May 2022 ASR) to repurchase an aggregate of $200.0 million of our common stock. Pursuant to the May 2022 ASR, we made a prepayment of $200.0 million to receive initial deliveries of shares valued at $160.0 million. The remaining balance of $40.0 million
was settled in August 2022. Total shares purchased under the May 2022 ASR were approximately 0.6 million shares, at an average purchase price of $320.24 per share.
During the three months ended July 31, 2022, we also repurchased on the open market approximately 0.2 million shares of our common stock at an average price of $298.50 per share for an aggregate purchase price of $57.3 million.
As of July 31, 2022, $242.7 million remained available for future repurchases under the Program. The pace of our repurchase activity will depend on factors such as our working capital needs, our cash requirements for acquisitions, our debt repayment obligations, our stock price, and economic and market conditions.
The IR Act was enacted in the United States on August 16, 2022. The IR Act imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The total taxable value of shares repurchased is reduced by the fair market value of any newly issued shares during the taxable year. We are assessing the potential impact of the stock repurchase excise tax, but based on our preliminary assessment, we do not expect a material impact on our consolidated financial statements.
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