filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
60K characters. Original on sec.gov · Markdown
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, technology and services; business and market outlook, opportunities and strategies; the expected impact of U.S. and foreign government actions and regulatory changes, including export control restrictions, on our financial results; the potential impact of the uncertain macroeconomic environment on our financial results, including, but not limited to, the effects of increased global inflationary pressures and interest rates, U.S. federal debt ceiling negotiations, bank failures, potential economic slowdowns or recessions, supply chain disruptions, and geopolitical pressures including the unknown impact of current and future U.S. and Chinese trade regulations, changes in China-Taiwan relations and the war in Ukraine, fluctuations in foreign exchange rates, and associated global economic conditions; 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; and the impact and result of pending legal, administrative and tax proceedings. 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 condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q (this Quarterly 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, 2022, as filed with the SEC on December 12, 2022 (our Annual Report).
Overview
Business Summary
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 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 Design Automation segment.
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. These products and services are part of our Design IP 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 Design Automation and Design 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 segment 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. Summary of Significant Accounting Policies 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 Design Automation products, expanding and proliferating our Design 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.
Recent Developments
Developments in Export Control Regulations
On October 7, 2022, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce published changes to U.S. export control regulations (U.S. Export Regulations), including new restrictions on Chinese entities' ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. Further, on October 14, 2022, a new rule went into effect imposing U.S. export controls on additional technologies, including electronic computer-aided design software specially designed for the development of ICs with Gate-All-Around Field-Effect Transistor structures. Based on our current understanding, we believe these regulations will not have a material impact on our business. We anticipate additional changes to U.S. Export Regulations in the future, but we cannot forecast the scope or timing of such changes. We will continue to monitor such developments, including potential additional trade restrictions, and other regulatory or policy changes by the U.S. and foreign governments.
For more on risks related to government export and import restrictions such as the U.S. government’s Entity List and other U.S. Export Regulations, see Part II, Item 1A, Risk Factors, “Industry Risks – We are subject to governmental export and import requirements that could subject us to liability and restrict our ability to sell our products and services, which could impair our ability to compete in international markets.”
Impact of the Current Macroeconomic Environment
Uncertainty in the macroeconomic environment, including the effects of increased global inflationary pressures and interest rates, U.S. federal debt ceiling negotiations, bank failures, potential economic slowdowns or recessions, supply chain disruptions, geopolitical pressures, including the unknown impact of current and future U.S. and Chinese trade regulations, changes in China-Taiwan relations and the war in Ukraine, fluctuations in foreign exchange rates, and associated global economic conditions, have resulted in volatility in credit, equity and foreign currency markets.
In addition, these uncertain macroeconomic conditions could lead some of our customers to postpone their decision-making, decrease their spending and/or delay their payments to us. For example, we continued to experience a minor impact from the current macroeconomic environment in our Software Integrity segment as customers applied elevated levels of scrutiny to purchasing decisions, which has, in some cases, caused some customers to elect shorter term contracts due to their own budget uncertainty. Although we have not experienced a material adverse impact to date, if these uncertain macroeconomic conditions persist, they may have an adverse impact on certain aspects of our business.
While our time-based business model provides stability to our business, operating results and overall financial position, the broader implications of these macroeconomic events, particularly in the long term, remain uncertain. Further, the negative impact of these events or disruptions may be deferred due to our business model.
See Part II, Item 1A, Risk Factors in this Quarterly Report for further discussion of the impact of global macroeconomic uncertainty on our business, operations and financial condition.
Business Segments
Effective in the first quarter of fiscal 2023, we realigned our organizational structure to evaluate the results of our Design IP business separately. Our Chief Operating Decision Maker (CODM), our Chief Executive Officer, now regularly reviews disaggregated segment information, assesses performance against our key growth strategies and allocates resources based on this new organizational structure. As a result, effective in the first quarter of fiscal 2023, we changed our reportable segments from two reportable segments to the following three reportable segments: (1) Design Automation, which includes EDA tools, system integration solutions and other associated revenue categories, (2) Design IP, which includes IP products, and (3) Software Integrity, which includes a comprehensive solution for building integrity—security, quality and compliance testing—into the customers' software development lifecycle and supply chain. As such, prior period reportable segment results and related disclosures have been reclassified to reflect our current reportable segments.
As a result of the change in reporting structure, financial information provided to and used by the CODM to assist in making operational decisions, allocating resources and assessing performance reflects consolidated financial information as well as revenue, adjusted operating income, and adjusted operating margin for the Design Automation, Design IP, and Software Integrity segments, accompanied by disaggregated information relating to revenues by geographic region.
Design Automation. This segment includes our advanced silicon design, verification products and services and system integration products. This segment also includes digital, custom and field programmable gate array (FPGA) IC design software, verification software and hardware products, system integration products and services, 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.
Design IP. This segment includes our Design IP products that serve companies primarily in the semiconductor and electronics industries. 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 and Fiscal Quarter 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 2023 and 2022 are 52-week years ending on October 28, 2023 and October 29, 2022, respectively.
Our results of operations for the three and six months of fiscal 2023 and 2022 ended on April 29, 2023 and April 30, 2022, 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 ceased all Synopsys business operations in Russia commencing in the second quarter of fiscal 2022. We do not have operations or employees in Ukraine. The cessation 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 Estimates
Our condensed consolidated financial statements have been prepared in accordance with U.S. 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. Summary of Significant Accounting Principles and Basis of Presentation of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report for more 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:
-
Revenue recognition; and
-
Valuation of business combinations.
See Critical Accounting Estimates section of Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report for more information.
Results of Operations
Revenue
Our revenues are generated from three business segments: the Design Automation segment, the Design IP segment and the Software Integrity segment. See Note 17. Segment Disclosure of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report for more information about our reportable segments and revenue by geographic regions.
Further disaggregation of the revenues into various products and services within these three segments is summarized as follows:
Design Automation Segment
-
EDA solutions include digital, custom and FPGA IC design software, verification software and hardware products, system integration products and services, and obligations to provide unspecified updates and support services. EDA products and services are typically sold through Technology Subscription License (TSL) arrangements that grant customers the right to access and use all of the licensed products at the outset of an arrangement; 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.
-
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.
- 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.
Design IP Segment
- Design IP includes our Synopsys IP portfolio. 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 over time, generally using costs incurred or hours expended to measure progress.
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
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Design Automation | $ | 927.6 | $ | 817.8 | $ | 109.8 | 13 | % | |||||||||||||||
| Design IP | 335.2 | 348.5 | (13.3) | (4) | % | ||||||||||||||||||
| Software Integrity | 132.1 | 112.9 | 19.2 | 17 | % | ||||||||||||||||||
| Total | $ | 1,394.9 | $ | 1,279.2 | $ | 115.7 | 9 | % | |||||||||||||||
| Six months ended | |||||||||||||||||||||||
| Design Automation | $ | 1,817.4 | $ | 1,621.7 | $ | 195.7 | 12 | % | |||||||||||||||
| Design IP | 678.8 | 707.4 | (28.6) | (4) | % | ||||||||||||||||||
| Software Integrity | 260.0 | 220.4 | 39.6 | 18 | % | ||||||||||||||||||
| Total | $ | 2,756.2 | $ | 2,549.5 | $ | 206.7 | 8 | % |
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, Flexible Spending Account (FSA) drawdowns, royalties, and hardware products sales. As revenues from IP products sales and hardware products sales are recognized upfront, customer demand and timing requirements for such IP products and hardware products could result in increased variability of our total revenues.
Contracted but unsatisfied or partially unsatisfied performance obligations as of April 30, 2023 were $7.3 billion. The amount and composition of unsatisfied performance obligations will fluctuate period to period. We do not believe the amount of unsatisfied performance obligations is indicative of future sales or revenue, or that such obligations at the end of any given period correlates with actual sales performance of a particular geography or particular products and services. For more information regarding our revenue during the three and six months ended April 30, 2023, including our contract balances as of such date, see Note 3. Revenue of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report*.*
The increase in total revenues for the three and six months ended April 30, 2023 compared to the same periods in fiscal 2022 was due to the continued organic growth of our business across a majority of product groups and geographies.
For a discussion of revenue by geographic areas, see Note 17. Segment Disclosure of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report.
Time-Based Products Revenue
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 808.2 | $ | 723.8 | $ | 84.4 | 12 | % | |||||||||||||||
| Percentage of total revenue | 58 | % | 57 | % | |||||||||||||||||||
| Six months ended | $ | 1,590.5 | $ | 1,431.3 | $ | 159.2 | 11 | % | |||||||||||||||
| Percentage of total revenue | 58 | % | 56 | % |
The increase in time-based products revenue for the three and six months ended April 30, 2023 compared to the same periods in fiscal 2022 was primarily attributable to an increase in TSL license revenue and higher renewals from arrangements booked in prior periods.
Upfront Products Revenue
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 345.5 | $ | 336.6 | $ | 8.9 | 3 | % | |||||||||||||||
| Percentage of total revenue | 25 | % | 26 | % | |||||||||||||||||||
| Six months ended | $ | 682.2 | $ | 704.9 | $ | (22.7) | (3) | % | |||||||||||||||
| Percentage of total revenue | 25 | % | 28 | % |
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 months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to an increase in the sale of hardware products, partially offset by a decrease in the sale of IP products, driven by timing of customer demands.
The decrease in upfront products revenue for the six months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to a decrease in the sale of IP products, partially offset by an increase in the sale of hardware products, driven by timing of customer demands.
Upfront products revenue as a percentage of total revenue will likely fluctuate based on the timing of IP products and hardware products sales. Such fluctuations will continue to be impacted by the timing of shipments or FSA drawdowns due to customer requirements.
Maintenance and Service Revenue
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Maintenance revenue | $ | 80.1 | $ | 72.6 | $ | 7.5 | 10 | % | |||||||||||||||
| Professional services and other revenue | 161.0 | 146.2 | 14.8 | 10 | % | ||||||||||||||||||
| Total | $ | 241.1 | $ | 218.8 | $ | 22.3 | 10 | % | |||||||||||||||
| Percentage of total revenue | 17 | % | 17 | % | |||||||||||||||||||
| Six months ended | |||||||||||||||||||||||
| Maintenance revenue | $ | 161.5 | $ | 138.1 | $ | 23.4 | 17 | % | |||||||||||||||
| Professional services and other revenue | 322.0 | 275.2 | 46.8 | 17 | % | ||||||||||||||||||
| Total | $ | 483.5 | $ | 413.3 | $ | 70.2 | 17 | % | |||||||||||||||
| Percentage of total revenue | 17 | % | 16 | % |
The increase in maintenance revenue for the three and six months ended April 30, 2023 compared to the same periods in fiscal 2022 was primarily due to an increase in the volume of hardware arrangements that include maintenance.
The increase in professional services and other revenue for the three and six months ended April 30, 2023 compared to the same periods in fiscal 2022 was primarily due to the timing of IP customization projects.
Cost of Revenue
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Cost of products revenue | $ | 184.7 | $ | 150.7 | $ | 34.0 | 23 | % | |||||||||||||||
| Cost of maintenance and service revenue | 95.4 | 87.7 | 7.7 | 9 | % | ||||||||||||||||||
| Amortization of intangible assets | 17.9 | 14.4 | 3.5 | 24 | % | ||||||||||||||||||
| Total | $ | 298.0 | $ | 252.8 | $ | 45.2 | 18 | % | |||||||||||||||
| Percentage of total revenue | 21 | % | 20 | % | |||||||||||||||||||
| Six months ended | |||||||||||||||||||||||
| Cost of products revenue | $ | 359.1 | $ | 316.1 | $ | 43.0 | 14 | % | |||||||||||||||
| Cost of maintenance and service revenue | 186.8 | 165.9 | 20.9 | 13 | % | ||||||||||||||||||
| Amortization of intangible assets | 36.5 | 27.8 | 8.7 | 31 | % | ||||||||||||||||||
| Total | $ | 582.4 | $ | 509.8 | $ | 72.6 | 14 | % | |||||||||||||||
| Percentage of total revenue | 21 | % | 20 | % |
We divide cost of revenue into three categories: cost of products revenue, cost of maintenance and service revenue, and amortization of intangible assets.
Cost of products revenue. Cost of products revenue includes costs related to products sold and software licensed, hardware-related costs, allocated operating costs related to product support and distribution, 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 services, such as hotline and on-site support, production services and documentation of maintenance updates.
Amortization of intangible assets. Amortization of intangible assets, included in cost of revenue, consists of the amortization of core/developed technology and certain contract rights intangible assets.
The increase in cost of revenue for the three months ended April 30, 2023 compared to the same period in fiscal 2022, was primarily due to increases of $19.3 million in employee-related costs as a result of headcount increases from hiring and acquisitions, $14.3 million in hardware-related costs, $4.4 million in facility costs, $3.5 million in amortization of technology-related intangible assets, and $2.2 million in the fair value of our executive deferred compensation plan assets.
The increase in cost of revenue for the six months ended April 30, 2023 compared to the same period in fiscal 2022, was primarily due to increases of $42.8 million in employee-related costs as a result of headcount increases from hiring and acquisitions, $8.7 million in amortization of technology-related intangible assets, $8.7 million in facility costs, $4.9 million in the fair value of our executive deferred compensation plan assets, and $1.5 million in hardware-related costs.
Operating Expenses
Research and Development
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 485.6 | $ | 390.0 | $ | 95.6 | 25 | % | |||||||||||||||
| Percentage of total revenue | 35 | % | 30 | % | |||||||||||||||||||
| Six months ended | $ | 950.9 | $ | 773.9 | $ | 177.0 | 23 | % | |||||||||||||||
| Percentage of total revenue | 35 | % | 30 | % |
The increase in research and development expenses for the three months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to increases of $48.0 million in employee-related costs as a result of headcount increases as we continue to expand and enhance our product portfolio, $20.8 million in the fair value of our executive deferred compensation plan assets, $9.6 million in facility costs, and $1.7 million in consultant and contractor costs.
The increase in research and development expenses for the six months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to increases of $93.1 million in employee-related costs as a result of headcount increases as we continue to expand and enhance our product portfolio, $45.8 million in the fair value of our executive deferred compensation plan assets, $19.3 million in facility costs, and $2.3 million in consultant and contractor costs.
Sales and Marketing
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 222.1 | $ | 191.6 | $ | 30.5 | 16 | % | |||||||||||||||
| Percentage of total revenue | 16 | % | 15 | % | |||||||||||||||||||
| Six months ended | $ | 432.9 | $ | 372.1 | $ | 60.8 | 16 | % | |||||||||||||||
| Percentage of total revenue | 16 | % | 15 | % |
The increase in sales and marketing expenses for the three months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to increases of $16.4 million in employee-related costs due to headcount increases, $4.8 million in the fair value of our executive deferred compensation plan assets, $4.2 million in travel and marketing expenses due to an increased number of in-person meetings and events, and $2.6 million in facility costs.
The increase in sales and marketing expenses for the six months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to increases of $27.6 million in employee-related costs due to headcount increases, $10.7 million in the fair value of our executive deferred compensation plan assets, $10.2 million in travel and marketing expenses due to an increased number of in-person meetings and events, and $4.7 million in facility costs.
General and Administrative
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | $ | 91.1 | $ | 74.0 | $ | 17.1 | 23 | % | |||||||||||||||
| Percentage of total revenue | 7 | % | 6 | % | |||||||||||||||||||
| Six months ended | $ | 188.4 | $ | 155.0 | $ | 33.4 | 22 | % | |||||||||||||||
| Percentage of total revenue | 7 | % | 6 | % |
The increase in general and administrative expenses for the three months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to bad debt recoveries of $15.9 million in the second quarter of fiscal 2022, and increases of $5.5 million in employee-related costs due to headcount increases from hiring and $4.4 million in the fair value of our executive deferred compensation plan assets. These increases were partially offset by a decrease of $3.8 million in legal, consulting and other professional fees.
The increase in general and administrative expenses for the six months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to bad debt recoveries of $15.9 million in the second quarter of fiscal 2022, and increases of $16.2 million in employee-related costs due to headcount increases from hiring and $10.6 million in the fair value of our executive deferred compensation plan assets. These increases were partially offset by a decrease of $1.3 million in legal, consulting and other professional fees.
Amortization of Intangible Assets
Amortization of intangible assets, included in operating expenses, consists of the amortization of trademarks, trade names and customer relationships related to acquisitions.
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | 6.6 | 6.9 | (0.3) | (4) | % | ||||||||||||||||||
| Percentage of total revenue | — | % | 1 | % | |||||||||||||||||||
| Six months ended | 13.3 | 15.9 | (2.6) | (16) | % | ||||||||||||||||||
| Percentage of total revenue | — | % | 1 | % |
The decrease in amortization of intangible assets for the three and six months ended April 30, 2023 compared to the same periods in fiscal 2022 was primarily due to certain intangible assets becoming fully amortized, partially offset by amortization expense related to intangible assets acquired during the three and six months ended April 30, 2023.
Restructuring Charges
In the first quarter of fiscal 2023, we initiated a restructuring plan for involuntary employee terminations as part of a business reorganization (the 2023 Plan). Total charges under the 2023 Plan are expected to be in the range of $50.0 million and $70.0 million, and consist primarily of severance costs and facility exit costs. The 2023 Plan is anticipated to be completed in the third quarter of fiscal 2023. We recorded restructuring charges of $4.1 million and $45.0 million, respectively, during the three and six months ended April 30, 2023.
See Note 9. Restructuring Charges of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report for more information.
Other Income (Expense), Net
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Interest income | $ | 8.1 | $ | 1.3 | $ | 6.8 | 523 | % | |||||||||||||||
| Interest expense | (0.3) | (0.4) | 0.1 | (25) | % | ||||||||||||||||||
| Gains (losses) on assets related to executive deferred compensation plan | 2.8 | (29.3) | 32.1 | (110) | % | ||||||||||||||||||
| Foreign currency exchange gains (losses) | (2.4) | 4.9 | (7.3) | (149) | % | ||||||||||||||||||
| Other, net | (3.9) | (0.4) | (3.5) | 875 | % | ||||||||||||||||||
| Total | $ | 4.3 | $ | (23.9) | $ | 28.2 | (118) | % | |||||||||||||||
| Six months ended | |||||||||||||||||||||||
| Interest income | $ | 15.0 | $ | 2.1 | $ | 12.9 | 614 | % | |||||||||||||||
| Interest expense | (0.6) | (0.9) | 0.3 | (33) | % | ||||||||||||||||||
| Gains (losses) on assets related to executive deferred compensation plan | 23.0 | (48.9) | 71.9 | (147) | % | ||||||||||||||||||
| Foreign currency exchange gains (losses) | 0.3 | 3.8 | (3.5) | (92) | % | ||||||||||||||||||
| Other, net | (10.2) | 0.2 | (10.4) | (5,200) | % | ||||||||||||||||||
| Total | $ | 27.5 | $ | (43.7) | $ | 71.2 | (163) | % |
The increase in other income (expense) for the three and six months ended April 30, 2023 as compared to the same periods in fiscal 2022 was primarily due to the increase 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, changes in the fair value of deferred compensation plan, restructuring charges, and certain other operating expenses. See Note 17. Segment Disclosure of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report for more information.
Design Automation Segment
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 360.1 | $ | 321.4 | $ | 38.7 | 12 | % | |||||||||||||||
| Adjusted operating margin | 39 | % | 39 | % | — | % | — | % | |||||||||||||||
| Six months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 706.1 | $ | 614.7 | $ | 91.4 | 15 | % | |||||||||||||||
| Adjusted operating margin | 39 | % | 38 | % | 1 | % | 3 | % |
The increase in adjusted operating income for the three and six months ended April 30, 2023 compared to the same periods in fiscal 2022 was primarily due to an increase in revenue from arrangements booked in prior periods.
Design IP Segment
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 86.3 | $ | 135.7 | $ | (49.4) | (36) | % | |||||||||||||||
| Adjusted operating margin | 26 | % | 39 | % | (13) | % | (33) | % | |||||||||||||||
| Six months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 203.9 | $ | 289.9 | $ | (86.0) | (30) | % | |||||||||||||||
| Adjusted operating margin | 30 | % | 41 | % | (11) | % | (27) | % |
The decrease in adjusted operating income for the three and six months ended April 30, 2023 compared to the same periods in fiscal 2022 was primarily due to a decrease in the revenue of IP products driven by timing of customer demands and an increase in employee-related costs due to headcount increases.
Software Integrity Segment
| April 30, | |||||||||||||||||||||||
| 2023 | 2022 | Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 18.3 | $ | 13.0 | $ | 5.3 | 41 | % | |||||||||||||||
| Adjusted operating margin | 14 | % | 12 | % | 2 | % | 17 | % | |||||||||||||||
| Six months ended | |||||||||||||||||||||||
| Adjusted operating income | $ | 33.8 | $ | 25.0 | $ | 8.8 | 35 | % | |||||||||||||||
| Adjusted operating margin | 13 | % | 11 | % | 2 | % | 18 | % |
The increase in adjusted operating income for the three and six months ended April 30, 2023 compared to the same periods in fiscal 2022 was primarily due to an increase in revenue from arrangements booked in prior periods.
Income Taxes
Our effective tax rate decreased in the three months ended April 30, 2023 as compared to the same period in fiscal 2022, primarily due to higher foreign derived intangible income deduction, as a result of the Tax Act, and higher excess tax benefits from stock-based compensation. Our effective tax rate decreased for the six months ended April 30, 2023 as compared to the same period in fiscal 2022, primarily due to higher foreign derived intangible income deduction offset by lower excess tax benefits from stock-based compensation.
See Note 19. Income Taxes of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report 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 April 30, 2023, we held $1.7 billion in cash, cash equivalents and short-term investments. We also held $1.8 million in restricted cash primarily associated with deposits for office leases. 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 with an overall weighted-average credit rating of AA.
As of April 30, 2023, approximately $834.3 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. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. 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.
Effective fiscal 2023, our research and development expenditures are required to be capitalized and amortized under the Tax Act instead of being deducted when incurred for US tax purposes. This results in a significant increase to our cash tax liabilities for fiscal 2023. As a result of the IRS tax relief for the California winter storms, we have deferred our fiscal 2023 federal cash tax payments until the fourth quarter of fiscal 2023. See Note 19 Income Taxes of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report for further discussion.
During the six months ended April 30, 2023, 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 condensed consolidated statements of cash flows and other commitments of our liquidity and capital resources during the six months ended April 30, 2023.
Cash Flows
| Six Months Ended April 30, | |||||||||||||||||
| 2023 | 2022 | $ Change | |||||||||||||||
| (dollars in millions) | |||||||||||||||||
| Cash provided by operating activities | $ | 817.7 | $ | 905.7 | $ | (88.0) | |||||||||||
| Cash used in investing activities | (127.7) | (186.0) | 58.3 | ||||||||||||||
| Cash used in financing activities | (591.2) | (559.1) | (32.1) |
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 decrease in cash provided by operating activities for the six months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to lower net income and timing of customer billings, partially offset by lower disbursements for operations, including vendor and tax payments.
Cash Used in Investing Activities
The decrease in cash used in investing activities for the six months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to lower cash paid for acquisitions of $67.7 million, and higher proceeds from the sales and maturities of investments of $30.7 million, partially offset by higher purchases of property and equipment of $24.0 million, and higher purchases of investments of $16.6 million.
Cash Used in Financing Activities
The increase in cash used in financing activities for the six months ended April 30, 2023 compared to the same period in fiscal 2022 was primarily due to higher stock repurchases of $105.7 million, partially offset by lower debt repayments of $74.6 million.
Credit and Term Loan Facilities
On December 14, 2022, we entered into a Fifth Extension and Amendment Agreement (the Fifth Amendment), which amended and restated our previous credit agreement, dated as of January 22, 2021 (as amended and restated, the Credit Agreement).
The Fifth Amendment increased the existing senior unsecured revolving credit facility (the Revolver) from $650.0 million to $850.0 million and extended the maturity date from January 22, 2024 to December 14, 2027, which could be further extended at our option. The Credit Agreement also provides an uncommitted incremental revolving loan facility of up to $150.0 million in the aggregate principal amount. The Credit Agreement contains a financial covenant requiring us to maintain a maximum consolidated leverage ratio, as well as other non-financial covenants. There was no outstanding balance under the Revolver as of April 30, 2023.
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 April 30, 2023, we had $20.2 million outstanding balance under the agreement.
See Note 10. Credit and Term Loan Facilities of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report for more information.
Stock Repurchase Program
In September 2022, our Board of Directors (the Board) approved a replenishment of our stock repurchase program (the Program) with authorization to purchase up to $1.5 billion of our common stock.
In February 2023, we entered into an accelerated stock repurchase agreement (the February 2023 ASR) to repurchase an aggregate of $300.0 million of our common stock. Pursuant to the February 2023 ASR, we made a prepayment of $300.0 million to receive initial deliveries of shares valued at $255.0 million. The remaining balance of $45.0 million was settled in May 2023. Total shares purchased under the February 2023 ASR were approximately 0.8 million shares, at an average purchase price of $364.1 per share.
As of April 30, 2023, $794.3 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. Based on our preliminary assessment, we do not expect a material impact on our overall capital allocation strategy or our consolidated financial statements. Risks related to the IR Act are described in Part II, Item 1A, Risk Factors.
Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk