Item 1. Financial Statements

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Item 1. Financial Statements

SYNOPSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amounts)


	July 31, 2023		October 31, 2022
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,686,144	$	1,417,608
Short-term investments	148,443		147,913
Total cash, cash equivalents and short-term investments	1,834,587		1,565,521
Accounts receivable, net	666,577		796,091
Inventories	282,791		211,927

Prepaid and other current assets	484,357		439,130
Total current assets	3,268,312		3,012,669
Property and equipment, net	535,973		483,300
Operating lease right-of-use assets, net	574,727		559,090
Goodwill	3,887,860		3,842,234
Intangible assets, net	336,723		386,446

Deferred income taxes	813,810		670,653
Other long-term assets	505,826		463,695
Total assets	$	9,923,231	$	9,418,087
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	905,464	$	809,403
Operating lease liabilities	80,192		54,274

Deferred revenue	1,744,326		1,910,822

Total current liabilities	2,729,982		2,774,499
Long-term operating lease liabilities	590,827		581,273

Long-term deferred revenue	194,860		154,472
Long-term debt	18,165		20,824
Other long-term liabilities	389,516		327,829
Total liabilities	3,923,350		3,858,897
Redeemable non-controlling interest	35,877		38,664
Stockholders’ equity:
Preferred stock, $0.01 par value: 2,000 shares authorized; none outstanding	—		—
Common stock, $0.01 par value: 400,000 shares authorized; 152,125 and 152,375 shares outstanding, respectively	1,521		1,524
Capital in excess of par value	1,257,382		1,487,126
Retained earnings	6,389,825		5,534,307
Treasury stock, at cost: 5,136 and 4,886 shares, respectively	(1,542,889)		(1,272,955)
Accumulated other comprehensive income (loss)	(147,284)		(234,277)
Total Synopsys stockholders’ equity	5,958,555		5,515,725
Non-controlling interest	5,449		4,801
Total stockholders’ equity	5,964,004		5,520,526
Total liabilities, redeemable non-controlling interest and stockholders’ equity	$	9,923,231	$	9,418,087

See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

SYNOPSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
Revenue:
Time-based products	$	922,874	$	754,322	$	2,513,383	$	2,185,626
Upfront products	297,967		268,584		980,149		973,483
Total products revenue	1,220,841		1,022,906		3,493,532		3,159,109
Maintenance and service	266,447		224,860		749,959		638,141
Total revenue	1,487,288		1,247,766		4,243,491		3,797,250
Cost of revenue:
Products	190,809		164,077		549,908		480,166
Maintenance and service	98,299		87,774		285,056		253,665
Amortization of intangible assets	18,374		19,330		54,886		47,145
Total cost of revenue	307,482		271,181		889,850		780,976
Gross margin	1,179,806		976,585		3,353,641		3,016,274
Operating expenses:
Research and development	507,402		444,826		1,458,328		1,218,761
Sales and marketing	227,134		199,246		660,034		571,329
General and administrative	109,714		91,461		298,161		246,426
Amortization of intangible assets	6,697		7,124		19,996		23,036
Restructuring charges	33,385		—		78,384		12,057
Total operating expenses	884,332		742,657		2,514,903		2,071,609
Operating income	295,474		233,928		838,738		944,665
Other income (expense), net	25,808		2,426		53,353		(41,280)
Income before income taxes	321,282		236,354		892,091		903,385
Provision (benefit) for income taxes	(11,773)		16,708		20,461		76,506
Net income	$	333,055	$	219,646	$	871,630	$	826,879
Net income (loss) attributed to non-controlling interest and redeemable non-controlling interest	(3,197)		(2,980)		(9,068)		(4,215)
Net income attributed to Synopsys	$	336,252	$	222,626	$	880,698	$	831,094

Net income per share attributed to Synopsys:
Basic	$	2.21	$	1.46	$	5.79	$	5.43
Diluted	$	2.17	$	1.43	$	5.68	$	5.31
Shares used in computing per share amounts:
Basic	152,023		152,938		152,204		153,082
Diluted	154,947		155,806		155,119		156,545

See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

SYNOPSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
Net income	$	333,055	$	219,646	$	871,630	$	826,879
Other comprehensive income (loss):
Change in foreign currency translation adjustment	(12,232)		(23,378)		19,297		(63,989)
Changes in unrealized gains (losses) on available-for-sale securities, net of tax of $0 for periods presented	(212)		(1)		1,326		(1,674)
Cash flow hedges:
Deferred gains (losses), net of tax $(2,147) and $(14,995) for the three and nine months ended July 31, 2023, respectively, and of $6,780 and $16,191 for each of the same periods in fiscal 2022, respectively.	5,907		(19,051)		43,489		(41,769)
Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(2,111) and $(8,707), for the three and nine months ended July 31, 2023, and of $(28) and $(499) for each of the same periods in fiscal 2022, respectively.	5,250		36		22,881		1,543
Other comprehensive income (loss), net of tax effects	(1,287)		(42,394)		86,993		(105,889)
Comprehensive income	331,768		177,252		958,623		720,990
Less: net income (loss) attributed to non-controlling interest and redeemable non-controlling interest	(3,197)		(2,980)		(9,068)		(4,215)
Comprehensive income attributed to Synopsys	$	334,965	$	180,232	$	967,691	$	725,205

See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

SYNOPSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)


				Capital in Excess of Par Value		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Synopsys Stockholders’ Equity		Non-controlling Interest		Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance at April 30, 2023	152,251	$	1,523	$	1,330,072	$	6,075,009	$	(1,428,748)	$	(145,997)	$	5,831,859	$	5,086	$	5,836,945
Net income						336,252						336,252		(557)		335,695
Other comprehensive income (loss), net of tax effects										(1,287)		(1,287)				(1,287)
Purchases of treasury stock	(751)	(8)		8				(300,000)				(300,000)				(300,000)

Common stock issued, net of shares withheld for employee taxes	625	6		(215,666)		(18,796)		185,859				(48,597)				(48,597)
Stock-based compensation				142,968								142,968		1,496		144,464
Adjustments to redeemable non-controlling interest						(2,640)						(2,640)				(2,640)
Recognition of non-controlling interest upon issuance of subsidiary stock												—		(576)		(576)
Balance at July 31, 2023	152,125	$	1,521	$	1,257,382	$	6,389,825	$	(1,542,889)	$	(147,284)	$	5,958,555	$	5,449	$	5,964,004

Balance at October 31, 2022	152,375	$	1,524	$	1,487,126	$	5,534,307	$	(1,272,955)	$	(234,277)	$	5,515,725	$	4,801	$	5,520,526
Net income						880,698						880,698		(1,217)		879,481
Other comprehensive income (loss), net of tax effects										86,993		86,993				86,993
Purchases of treasury stock	(2,382)	(24)		24				(860,724)				(860,724)				(860,724)
Equity forward contract, net				(45,000)								(45,000)				(45,000)
Common stock issued, net of shares withheld for employee taxes	2,132	21		(603,944)		(19,108)		590,790				(32,241)				(32,241)
Stock-based compensation				418,047								418,047		3,902		421,949
Adjustments to redeemable non-controlling interest						(6,072)						(6,072)				(6,072)
Recognition of non-controlling interest upon issuance of subsidiary stock				1,129								1,129		(2,037)		(908)
Balance at July 31, 2023	152,125	$	1,521	$	1,257,382	$	6,389,825	$	(1,542,889)	$	(147,284)	$	5,958,555	$	5,449	$	5,964,004

				Capital in Excess of Par Value		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Synopsys Stockholders’ Equity		Non-controlling Interest		Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance at April 30, 2022	152,955	$	1,530	$	1,517,481	$	5,157,633	$	(999,234)	$	(113,099)	$	5,564,311	$	3,119	$	5,567,430
Net income						222,626						222,626		(307)		222,319

Other comprehensive income (loss), net of tax effects										(42,394)		(42,394)				(42,394)
Purchases of treasury stock	(715)	(8)		8				(217,266)				(217,266)				(217,266)
Equity forward contract, net				(40,000)								(40,000)				(40,000)
Common stock issued, net of shares withheld for employee taxes	764	8		(188,562)				181,659				(6,895)				(6,895)
Stock-based compensation				126,317								126,317		1,288		127,605
Adjustments to redeemable non-controlling interest						(2,673)						(2,673)				(2,673)
Balance at July 31, 2022	153,004	$	1,530	$	1,415,244	$	5,377,586	$	(1,034,841)	$	(155,493)	$	5,604,026	$	4,100	$	5,608,126

Balance at October 31, 2021	153,062	$	1,531	$	1,576,363	$	4,549,713	$	(782,866)	$	(49,604)	$	5,295,137	$	3,806	$	5,298,943
Net income						831,094						831,094		(994)		830,100

Other comprehensive income (loss), net of tax effects										(105,889)		(105,889)				(105,889)
Purchases of treasury stock	(2,400)	(24)		24				(752,266)				(752,266)				(752,266)
Equity forward contract, net				(5,000)								(5,000)				(5,000)
Common stock issued, net of shares withheld for employee taxes	2,342	23		(488,292)				500,291				12,022				12,022
Stock-based compensation				332,149								332,149		1,288		333,437
Adjustments to redeemable non-controlling interest						(3,221)						(3,221)				(3,221)
Balance at July 31, 2022	153,004	$	1,530	$	1,415,244	$	5,377,586	$	(1,034,841)	$	(155,493)	$	5,604,026	$	4,100	$	5,608,126

See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

SYNOPSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended July 31,
	2023		2022
Cash flows from operating activities:
Net income	$	871,630	$	826,879
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation	180,033		169,708
Reduction of operating lease right-of-use assets	72,647		65,980
Amortization of capitalized costs to obtain revenue contracts	61,677		54,438
Stock-based compensation	421,949		333,437
Allowance for credit losses	11,937		(4,516)



Deferred income taxes	(166,061)		5,843
Other non-cash	8,649		10,356
Net changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable	112,511		(121,786)
Inventories	(77,919)		118
Prepaid and other current assets	8,373		(56,075)
Other long-term assets	(116,487)		(20,058)
Accounts payable and accrued liabilities	48,574		(46,356)
Operating lease liabilities	(52,914)		(66,187)
Income taxes	123,924		(60,739)
Deferred revenue	(131,310)		254,353
Net cash provided by operating activities	1,377,213		1,345,395
Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments	104,139		70,847
Purchases of short-term investments	(102,457)		(73,330)
Proceeds from sales of long-term investments	7,248		582
Purchases of long-term investments	(435)		(7,000)

Purchases of property and equipment	(136,520)		(102,934)
Acquisitions, net of cash acquired	(51,324)		(416,323)
Capitalization of software development costs	(2,204)		(1,970)
Other	—		(1,200)
Net cash used in investing activities	(181,553)		(531,328)
Cash flows from financing activities:

Repayment of debt	(2,603)		(76,838)
Issuances of common stock	164,841		161,416
Payments for taxes related to net share settlement of equity awards	(198,969)		(149,130)
Purchase of equity forward contract	(45,000)		(40,000)
Purchases of treasury stock	(860,724)		(717,266)
Other	(122)		(3,413)
Net cash used in financing activities	(942,577)		(825,231)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	14,997		(38,155)
Net change in cash, cash equivalents and restricted cash	268,080		(49,319)
Cash, cash equivalents and restricted cash, beginning of year	1,419,864		1,435,183
Cash, cash equivalents and restricted cash, end of period	$	1,687,944	$	1,385,864

See the accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

SYNOPSYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business

Synopsys, Inc. (Synopsys, we, our or us) provides products and services used across the entire Silicon to Software spectrum, from engineers creating advanced semiconductors 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 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.

Note 2. Summary of Significant Accounting Policies and Basis of Presentation

We have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The condensed consolidated financial statements are unaudited but, in management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary for a fair presentation of our quarterly results. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in 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).

Use of Estimates. To prepare financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and could have a material impact on our operating results and financial position.

Principles of Consolidation. The condensed consolidated financial statements include our accounts and the accounts of our wholly and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Fiscal Year End. Our fiscal year generally 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 both 52-week years. Fiscal 2023 will end on October 28, 2023. Fiscal 2022 ended on October 29, 2022. For presentation purposes, the condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.

Comparability. Certain reclassifications have been made to the prior period's condensed consolidated financial statements to conform to the current year presentation. The reclassifications did not have a material impact on the prior period's condensed consolidated balance sheets, statements of income, statements of comprehensive income and statements of cash flows.

Segment Reporting. 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 (CEO), 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.

Goodwill. As a result of the change to our reportable segments, we reassessed our reporting units for the evaluation of goodwill during the first quarter of fiscal 2023. Prior to this change, our reporting units were determined to be the same as reportable segments for the purpose of goodwill impairment assessment. Our reassessment determined that we now have three reporting units, which are the same as our reportable segments.

Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and identifiable intangible assets acquired by us. The carrying amount of goodwill at each reporting unit is tested for impairment annually on the first day of the fourth fiscal quarter, or more frequently if facts and circumstances warrant a review. We perform either a qualitative or quantitative assessment for goodwill impairment test. When a quantitative goodwill impairment assessment is performed, we use an income approach based on discounted cash flow analysis, a market approach based on market multiples, or a combination of both. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment loss is recorded for the difference.

The change in reporting units was considered a triggering event, indicating a test for goodwill impairment was required before and after the change in reporting units. We performed those impairment tests, which did not result in the identification of an impairment loss as of January 31, 2023.

If assumptions or estimates with respect to our future performance vary from what is expected, including but not limited to those assumptions relating to inflationary pressure on costs and geopolitical uncertainties, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.

Assets Held for Sale. Assets are classified as held for sale when all of the following criteria for a plan of sale have been met: (i) management, having the authority to approve the action, commits to a plan to sell the assets; (ii) the assets are available for immediate sale in their present condition, subject only to terms that are usual and customary; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale of the assets is probable and is expected to be completed within one year; (v) the assets are being actively marketed for sale at a price that is reasonable in relation to their current fair value; and (vi) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Significant Accounting Policies. There have been no material changes to our significant accounting policies included in our Annual Report*.*

Recently Issued Accounting Pronouncements

In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (ASU 2022-03), which applies to all equity securities measured at fair value that are subject to contractual sale restrictions. This change prohibits entities from taking into account contractual restrictions on the sale of equity securities when estimating fair value and introduces required disclosures for such transactions. The standard will become effective for us beginning on November 1, 2024 and will be applied prospectively. Early adoption is permitted. Any future impact from the adoption of this guidance will depend on the facts and circumstances of future transactions.

Note 3. Revenue

Disaggregated Revenue

The following table showed the percentage of revenue by product groups:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
EDA	65.5	%	63.8	%	64.7	%	62.2	%
Design IP	23.5	%	25.1	%	24.3	%	26.9	%
Software Integrity	8.9	%	9.5	%	9.3	%	8.9	%
Other	2.1	%	1.6	%	1.7	%	2	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

Contract Balances

The contract assets indicated below are presented as prepaid and other current assets in the condensed consolidated balance sheets. The contract assets are transferred to receivables when the rights to invoice and receive payment become unconditional. Unbilled receivables are presented as accounts receivable, net, in the condensed consolidated balance sheets.

Contract balances were as follows:


	As of
	July 31, 2023		October 31, 2022
	(in thousands)
Contract assets, net	$	270,105	$	260,498
Unbilled receivables	$	49,261	$	46,254
Deferred revenue	$	1,939,186	$	2,065,294

During the three and nine months ended July 31, 2023, we recognized revenue of $344.9 million and $1.6 billion, respectively, including previously unfulfilled contracts that have expired and are no longer subject to an implied promise to provide future services, that was included in the deferred revenue balance as of October 31, 2022.

Contracted but unsatisfied or partially unsatisfied performance obligations were approximately $7.1 billion as of July 31, 2023, which includes $1.4 billion in non-cancellable Flexible Spending Account (FSA) commitments from customers where actual product selection and quantities of specific products or services are to be determined by customers at a later date. We have elected to exclude future sales-based royalty payments from the remaining performance obligations. Approximately 42% of the contracted but unsatisfied or partially unsatisfied performance obligations as of July 31, 2023, excluding non-cancellable FSA, are expected to be recognized over the next 12 months, with the remainder recognized thereafter.

During the three and nine months ended July 31, 2023, we recognized $24.2 million and $75.8 million, respectively, from performance obligations satisfied from sales-based royalties earned during the periods. During the three and nine months ended July 31, 2022, we recognized $33.9 million and $103.5 million, respectively, from performance obligations satisfied from sales-based royalties earned during the periods.

Costs of Obtaining a Contract with Customer

Capitalized commission costs, net of accumulated amortization, as of July 31, 2023 were $96.7 million and included in other long-term assets in our condensed consolidated balance sheets. Amortization of these assets was $22.1 million and $61.7 million during the three and nine months ended July 31, 2023, respectively, and included in sales and marketing expense in the condensed consolidated statements of income. Amortization of these assets was $19.9 million and $54.4 million during the three and nine months ended July 31, 2022, respectively, and included in sales and marketing expense in the condensed consolidated statements of income.

Note 4. Business Combination

During the nine months ended July 31, 2023, we completed two acquisitions for aggregate purchase consideration of $48.6 million, net of cash acquired. The purchase consideration was allocated as follows: $24.6 million to identifiable intangible assets and $28.5 million to goodwill. The total purchase consideration is preliminary, and as additional information becomes available, we may further revise it during the remainder of the measurement period, which will not exceed 12 months from the closing of the acquisition. The goodwill recognized from both acquisitions was assigned to the Design Automation reporting unit, and $5.7 million was deductible for income tax purposes.

We have included the financial results of these acquisitions in our condensed consolidated financial statements from the date of acquisition. These results were not material to our condensed consolidated financial statements.

Transaction costs were $4.5 million and $9.8 million during the three and nine months ended July 31, 2023, respectively. Transaction costs were $5.2 million and $11.3 million during the three and nine months ended July 31, 2022, respectively. These costs mainly consisted of professional fees and administrative costs and were expensed as incurred in our condensed consolidated statements of income.

Note 5. Goodwill and Intangible Assets

Goodwill

As a result of the change in reporting units effective in the first quarter of fiscal 2023, we estimated the fair value of our new reporting units and reallocated goodwill to the reporting units using a relative fair value method. No impairment of goodwill was identified for any period presented.

The changes in the carrying amount of goodwill during the nine months ended July 31, 2023 were as follows:


	(in thousands)




Balance at October 31, 2022	$	3,842,234
Additions	28,503
Adjustments	3,097
Effect of foreign currency translation	14,026
Balance at July 31, 2023	$	3,887,860

During the nine months ended July 31, 2023, we finalized certain estimates impacting total preliminary purchase consideration for certain acquisitions and recorded the resulting measurement period adjustments which increased goodwill.

Intangible Assets

Intangible assets as of July 31, 2023 consisted of the following:


	Gross Carrying Amount		Accumulated Amortization		Net Amount
	(in thousands)
Core/developed technology	$	1,101,118	$	866,708	$	234,410
Customer relationships	431,469		351,474		79,995
Contract rights intangible	193,120		190,036		3,084

Trademarks and trade names	52,825		36,736		16,089

Capitalized software development costs	50,795		47,650		3,145
Total	$	1,829,327	$	1,492,604	$	336,723

Intangible assets as of October 31, 2022 consisted of the following:


	Gross Carrying Amount		Accumulated Amortization		Net Amount
	(in thousands)
Core/developed technology	$	1,083,703	$	813,226	$	270,477
Customer relationships	426,242		333,984		92,258
Contract rights intangible	190,666		188,262		2,404

Trademarks and trade names	52,795		34,054		18,741

Capitalized software development costs	48,591		46,025		2,566
Total	$	1,801,997	$	1,415,551	$	386,446

Amortization expense related to intangible assets consisted of the following:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Core/developed technology	$	17,816	$	18,603	$	53,566	$	45,180
Customer relationships	5,801		6,322		17,314		20,819
Contract rights intangible	558		727		1,320		2,180

Trademarks and trade names	896		802		2,682		2,002
Capitalized software development costs(1)	557		619		1,626		2,052
Total	$	25,628	$	27,073	$	76,508	$	72,233

(1) Amortization of capitalized software development costs is included in cost of products revenue in the condensed consolidated statements of income.

The following table presented the estimated future amortization of intangible assets as of July 31, 2023:


Fiscal year	(in thousands)
Remainder of fiscal 2023	$	25,684
2024	93,465
2025	75,385
2026	61,840
2027	41,638
2028 and thereafter	38,711

Total	$	336,723

Note 6. Balance Sheets Components


	As of
	July 31, 2023		October 31, 2022
	(in thousands)

























Other long-term assets:
Deferred compensation plan assets	$	330,224	$	279,096
Capitalized commission, net	96,723		96,509


Other	78,879		88,090
Total	$	505,826	$	463,695

Accounts payable and accrued liabilities:
Payroll and related benefits	$	554,751	$	559,886
Accrued income taxes	165,514		35,290
Other accrued liabilities	118,649		176,647
Accounts payable	66,550		37,580
Total	$	905,464	$	809,403

Other long-term liabilities:
Deferred compensation plan liabilities	$	330,224	$	279,096
Other	59,292		48,733
Total	$	389,516	$	327,829

Assets Held for Sale

During the three months ended July 31, 2023, we commenced a plan to sell two office buildings with approximately 226,000 square feet. As of July 31, 2023, the office buildings had a carrying value of approximately $9.5 million, which was included within property and equipment, net in the condensed consolidated balance sheets.

Note 7. Financial Assets and Liabilities

Cash Equivalents and Short-term Investments

As of July 31, 2023, the balances of our cash equivalents and short-term investments were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses Less Than 12 Continuous Months		Gross Unrealized Losses 12 Continuous Months or Longer		Estimated Fair Value(1)
	(in thousands)
Cash equivalents:
Money market funds	$	200,288	$	—	$	—	$	—	$	200,288



U.S. government agency securities	2,284		—		—		—		2,284
Total:	$	202,572	$	—	$	—	$	—	$	202,572
Short-term investments:
U.S. government agency & T-bills	$	20,595	$	—	$	(82)	$	(6)	$	20,507
Municipal bonds	1,535		—		—		(22)		1,513


Corporate debt securities	96,614		42		(462)		(529)		95,665
Asset-backed securities	30,971		12		(109)		(116)		30,758


Total:	$	149,715	$	54	$	(653)	$	(673)	$	148,443

*(1)*See Note 8. Fair Value Measurements for further discussion on fair values.

The contractual maturities of our available-for-sale debt securities as of July 31, 2023 were as follows:


	Amortized Cost		Fair Value
	(in thousands)
less than 1 year	$	67,071	$	66,422
1-5 years	78,935		78,386
5-10 years	1,863		1,853
>10 years	1,846		1,782
Total	$	149,715	$	148,443

As of October 31, 2022, the balances of our cash equivalents and short-term investments were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses Less Than 12 Continuous Months		Gross Unrealized Losses 12 Continuous Months or Longer		Estimated Fair Value(1)
	(in thousands)
Cash equivalents:
Money market funds	$	77,683	$	—	$	—	$	—	$	77,683



Total:	$	77,683	$	—	$	—	$	—	$	77,683
Short-term investments:
U.S. government agency & T-bills	$	25,816	$	—	$	(174)	$	(39)	$	25,603
Municipal bonds	2,970		—		(12)		(80)		2,878
Corporate debt securities	95,899		7		(747)		(1,135)		94,024
Asset-backed securities	25,826		—		(149)		(269)		25,408




Total:	$	150,511	$	7	$	(1,082)	$	(1,523)	$	147,913

*(1)*See Note 8. Fair Value Measurements for further discussion on fair values.

Restricted cash. We include amounts generally described as restricted cash in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash flows. Restricted cash is primarily associated with office leases.

The following table provided a reconciliation of cash, cash equivalents and restricted cash included in the condensed consolidated balance sheets:


	As of
	July 31, 2023		October 31, 2022
	(in thousands)
Cash and cash equivalents	$	1,686,144	$	1,417,608
Restricted cash included in prepaid and other current assets	1,055		1,566
Restricted cash included in other long-term assets	745		690
Total cash, cash equivalents and restricted cash	$	1,687,944	$	1,419,864

Non-marketable equity securities. Our portfolio of non-marketable equity securities consists of strategic investments in privately held companies. There was no impairment of non-marketable equity securities during the three months ended July 31, 2023 and there was an immaterial impairment of a non-marketable equity security during the nine months ended July 31, 2023. There was no impairment of non-marketable equity securities during the three and nine months ended July 31, 2022.

Derivatives

We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheets at fair value and provide qualitative and quantitative disclosures about such derivatives. We operate internationally and

are exposed to potentially adverse movements in foreign currency exchange rates. We enter into hedges in the form of foreign currency forward contracts to reduce our exposure to foreign currency rate changes on non-functional currency denominated forecasted transactions and balance sheet positions including: (1) certain assets and liabilities, (2) shipments forecasted to occur within approximately one month, (3) future billings and revenue on previously shipped orders, and (4) certain future intercompany invoices denominated in foreign currencies.

The duration of forward contracts, the majority of which are short-term, ranges from approximately 1 month to 27 months at inception. We do not use foreign currency forward contracts for speculative or trading purposes. We enter into foreign exchange forward contracts with high credit quality financial institutions that are rated "A" or above and to date have not experienced nonperformance by counterparties. In addition, we mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty and anticipate continued performance by all counterparties to such agreements.

The assets or liabilities associated with the forward contracts are recorded at fair value in other current assets or accrued liabilities in the condensed consolidated balance sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the foreign currency forward contract and whether it is designated and qualifies for hedge accounting. The cash flow impact upon settlement of the derivative contracts is included in "net cash provided by operating activities" in the condensed consolidated statements of cash flows.

Cash Flow Hedging Activities

Certain foreign exchange forward contracts are designated and qualify as cash flow hedges. These contracts have durations of approximately 27 months or less. Certain forward contracts are rolled over periodically to capture the full length of exposure to our foreign currency risk, which can be up to three years. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on the hedged transactions. The related gains or losses resulting from changes in fair value of these hedges is initially reported, net of tax, as a component of other comprehensive income (loss) (OCI) in stockholders’ equity and reclassified into revenue or operating expenses, as appropriate, at the time the hedged transactions affect earnings. We expect a majority of the hedge balance in OCI to be reclassified to the statements of income within the next 12 months.

We did not record any gains or losses related to discontinuation of cash flow hedges during the nine months ended July 31, 2023 and 2022.

Non-designated Hedging Activities

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

We also have certain foreign exchange forward contracts for hedging certain international revenues and expenses that are not designated as hedging instruments. Accordingly, any gains or losses from changes in the fair value of the forward contracts are recorded in other income (expense), net. The gains and losses on these forward contracts generally offset the gains and losses associated with the foreign currency in operating income. The duration of these forward contracts is usually less than one year. The overall goal of our hedging program is to minimize the impact of currency fluctuations on the net income over the fiscal year.

The effects of the non-designated derivative instruments on the condensed consolidated statements of income were summarized as follows:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Gains (losses) recorded in other income (expense), net	$	(1,205)	$	(5,182)	$	3,532	$	(10,443)

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


	As of
	July 31, 2023		October 31, 2022
	(in thousands)
Total gross notional amounts	$	1,283,551	$	1,386,140
Net fair value	$	18,120	$	(50,080)

Our exposure to the market gains or losses will vary over time as a function of currency exchange rates. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

The following table represented the condensed consolidated balance sheets location and amount of derivative instrument fair values segregated between designated and non-designated hedge instruments:


	Fair values of derivative instruments designated as hedging instruments		Fair values of derivative instruments not designated as hedging instruments
	(in thousands)
Balance at July 31, 2023
Other current assets	$	22,487	$	91
Accrued liabilities	$	4,124	$	334
Balance at October 31, 2022
Other current assets	$	2,315	$	223
Accrued liabilities	$	52,171	$	447

The following table represented the location of the amount of gains and losses on derivative instrument fair values for designated hedge instruments, net of tax in the condensed consolidated statements of income:


	Location of gains (losses) recognized in OCI on derivatives	Amount of gains (losses) recognized in OCI on derivatives (effective portion)		Location of gains (losses) reclassified from OCI	Amount of gains (losses) reclassified from OCI (effective portion)
	(in thousands)
Three months ended July 31, 2023
Foreign exchange contracts	Revenue	$	899	Revenue	$	(1,352)
Foreign exchange contracts	Operating expenses	5,008		Operating expenses	(3,898)
Total		$	5,907		$	(5,250)
Three months ended July 31, 2022
Foreign exchange contracts	Revenue	$	(4,702)	Revenue	$	3,651
Foreign exchange contracts	Operating expenses	(14,349)		Operating expenses	(3,687)
Total		$	(19,051)		$	(36)
Nine months ended July 31, 2023
Foreign exchange contracts	Revenue	$	7,315	Revenue	$	(10,856)
Foreign exchange contracts	Operating expenses	36,174		Operating expenses	(12,025)
Total		$	43,489		$	(22,881)
Nine months ended July 31, 2022
Foreign exchange contracts	Revenue	$	(12,527)	Revenue	$	3,309
Foreign exchange contracts	Operating expenses	(29,242)		Operating expenses	(4,852)
Total		$	(41,769)		$	(1,543)

Note 8. Fair Value Measurements

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

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

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

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

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

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

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

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

Our borrowings under our credit and term loan facilities are classified within Level 2 because these borrowings are not actively traded and have a variable interest rate structure based upon market rates currently available to us for debt with similar terms and maturities. See Note 10. Credit and Term Loan Facilities of the Notes to Condensed Consolidated Financial Statements for more information on these borrowings.

Assets/Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis were summarized below as of July 31, 2023:


			Fair Value Measurement Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets
Cash equivalents:
Money market funds	$	200,288	200,288		$	—	$	—



U.S. government agency securities	2,284		—		2,284		—
Short-term investments:
U.S. government agency & T-bills	20,507		—		20,507		—
Municipal bonds	1,513		—		1,513		—


Corporate debt securities	95,665		—		95,665		—
Asset-backed securities	30,758		—		30,758		—


Prepaid and other current assets:
Foreign currency derivative contracts	22,578		—		22,578		—
Other long-term assets:
Deferred compensation plan assets	330,224		330,224		—		—
Total assets	$	703,817	$	530,512	$	173,305	$	—

Liabilities
Accounts payable and accrued liabilities:
Foreign currency derivative contracts	$	4,458	$	—	$	4,458	$	—
Other long-term liabilities:
Deferred compensation plan liabilities	330,224		330,224		—		—
Total liabilities	$	334,682	$	330,224	$	4,458	$	—

Assets and liabilities measured at fair value on a recurring basis were summarized below as of October 31, 2022:


			Fair Value Measurement Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets
Cash equivalents:
Money market funds	$	77,683	$	77,683	$	—	$	—



Short-term investments:
U.S. government agency & T-bills	25,603		—		25,603		—
Municipal bonds	2,878		—		2,878		—
Corporate debt securities	94,024		—		94,024		—
Asset-backed securities	25,408		—		25,408		—




Prepaid and other current assets:
Foreign currency derivative contracts	2,538		—		2,538		—
Other long-term assets:
Deferred compensation plan assets	279,096		279,096		—		—
Total assets	$	507,230	$	356,779	$	150,451	$	—
Liabilities
Accounts payable and accrued liabilities:
Foreign currency derivative contracts	$	52,618	$	—	$	52,618	$	—
Other long-term liabilities:
Deferred compensation plan liabilities	279,096		279,096		—		—
Total liabilities	$	331,714	$	279,096	$	52,618	$	—

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

Non-Marketable Equity Securities

Non-marketable equity securities are classified within Level 3 as they are valued using a combination of observable transaction price and unobservable inputs or data in an inactive market due to the absence of market price and inherent lack of liquidity.

Note 9. 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). The 2023 Plan was substantially completed in the third quarter of fiscal 2023 and total charges under the 2023 Plan were $78.4 million consisting primarily of severance costs and facility exit costs.

During the three and nine months ended July 31, 2023, we recorded restructuring charges of $33.4 million and $78.4 million, respectively, and made payments of $12.6 million and $49.4 million, respectively, under the 2023 Plan. As of July 31, 2023, the outstanding restructuring related liabilities were $29.0 million, with $24.3 million recorded in accounts payable and accrued liabilities and $4.7 million recorded in other long term liabilities in the condensed consolidated balance sheets.

Note 10. 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. As of July 31, 2023, we were in compliance with the financial covenant.

Borrowings bear interest at the adjusted term Secured Overnight Financing Rate (SOFR) plus an applicable margin between 0.785% and 0.975% based upon our consolidated leverage ratio. In addition, facility fees are payable on the Revolver at rates between 0.09% and 0.15% per year based on our leverage ratio on the daily amount of the revolving commitment.

There was no outstanding balance under the Revolver as of July 31, 2023 and October 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, 2023, we had $18.2 million outstanding balance under the agreement.

The carrying amount of the short-term and long-term debt approximates the estimated fair value.

Note 11. Leases

We have operating lease arrangements for office space, data center, equipment and other corporate assets. These leases have various expiration dates through December 31, 2042, some of which include options to extend the leases for up to 10 years. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments.

The components of our lease expense during the period presented were as follows:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Operating lease expense (1)	$	23,379	$	23,914	$	72,207	$	68,105

Variable lease expense (2)	5,722		2,910		14,976		7,904
Total lease expense	$	29,101	$	26,824	$	87,183	$	76,009

(1) Operating lease expense includes immaterial amounts of short-term leases, net of sublease income.

(2) Variable lease expense includes payments to lessors that are not fixed or determinable at lease commencement date. These payments primarily consist of maintenance, property taxes, insurance and variable indexed based payments.

Supplemental cash flow information during the period presented was as follows:


	Nine Months Ended July 31,
		2023		2022
		(in thousands)
Cash paid for amounts included in the measurement of operating lease liabilities		$	66,556	$	62,888
ROU assets obtained in exchange for operating lease liabilities		$	81,027	$	154,693

Lease term and discount rate information related to our operating leases as of the end of the period presented were as follows:


	As of
	July 31, 2023		October 31, 2022
Weighted-average remaining lease term (in years)	8.54		9.16
Weighted-average discount rate	2.44	%	2.19	%

The following table represented the maturities of our future lease payments due under operating leases as of July 31, 2023:


	Lease Payments
Fiscal year	(in thousands)
Remainder of fiscal 2023	$	11,763
2024	108,819
2025	99,178
2026	88,680
2027	87,185
2028 and thereafter	355,947
Total future minimum lease payments	751,572
Less: Imputed interest	80,553
Total lease liabilities	$	671,019

In addition, certain facilities owned by us were leased to third parties under non-cancellable operating lease agreements. These leases have annual escalating payments and have expiration dates through March 31, 2031 in accordance with the terms and conditions of the existing agreement. The lease receipts from owned facilities, including sublease income from other facilities leased by us, due to us as of July 31, 2023 were as follows:


	Lease Receipts
Fiscal year	(in thousands)
Remainder of fiscal 2023	$	4,162
2024	24,697
2025	25,350
2026	26,231
2027	27,377
2028 and thereafter	84,048
Total	$	191,865

Note 12. Redeemable Non-controlling Interest

During the second quarter of fiscal 2022, we acquired a 75% equity interest in OpenLight Photonics, Inc. (OpenLight) for cash consideration of $90.0 million. The remaining 25% equity interest in OpenLight is held by Juniper Networks, Inc. (the Minority Investor) from their contribution of IP and certain tangible assets.

The agreement with the Minority Investor contains redemption features whereby the interest held by the Minority Investor is redeemable either (1) at the option of the Minority Investor on or after the third anniversary of the acquisition or sooner in certain circumstances or (2) at our option beginning on the third anniversary of the acquisition. This option is exercisable at the greater of fair value at the time of redemption or $30.0 million and was valued at $10.1 million, resulting in a total consideration of $100.1 million.

During the nine months ended July 31, 2023, our ownership interest in OpenLight was reduced to 73% as a result of the recognition of non-controlling interest upon issuance of OpenLight stock.

During the nine months ended July 31, 2023, OpenLight incurred a net loss of $32.0 million, of which $7.9 million was attributable to redeemable non-controlling interest. Other adjustments to redeemable non-controlling interest were not material during this period. As of July 31, 2023, the carrying value of the redeemable non-controlling interest was recorded at its estimated fair value of $35.9 million in the condensed consolidated balance sheets.

Note 13. Accumulated Other Comprehensive Income (Loss)

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


	As of
	July 31, 2023		October 31, 2022
	(in thousands)
Cumulative currency translation adjustments	$	(136,895)	$	(156,192)
Unrealized gains (losses) on derivative instruments, net of taxes	(9,116)		(75,486)
Unrealized gains (losses) on available-for-sale securities, net of taxes	(1,273)		(2,599)
Total	$	(147,284)	$	(234,277)

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


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Reclassifications:
Gains (losses) on cash flow hedges, net of taxes
Revenues	$	(1,352)	$	3,651	$	(10,856)	$	3,309
Operating expenses	(3,898)		(3,687)		(12,025)		(4,852)


Total	$	(5,250)	$	(36)	$	(22,881)	$	(1,543)

Note 14. Stock Repurchase Program

In September 2022, our Board of Directors approved a replenishment of our stock repurchase program (the Program) with authorization to purchase up to $1.5 billion of our common stock.

In May 2023, we entered into an accelerated stock repurchase agreement (the May 2023 ASR) to repurchase an aggregate of $300.0 million of our common stock. Pursuant to the May 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 August 2023. Total shares purchased under the May 2023 ASR were approximately 0.7 million shares, at an average purchase price of $436.93 per share.

As of July 31, 2023, $494.3 million remained available for future repurchases under the Program.

Stock repurchase activities as well as the reissuance of treasury stock for employee stock-based compensation purposes were as follows:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023(1) (2)		2022(3)		2023(1)		2022(3)
	(in thousands)
Total shares repurchased	751		715		2,382		2,400

Total cost of the repurchased shares	$	300,000	$	217,266	$	860,724	$	752,266
Reissuance of treasury stock	625		764		2,132		2,342

(1) Excluded the 41,682 shares and $45.0 million equity forward contract from the May 2023 ASR settled in August 2023.

(2) Included the 105,792 shares and $45.0 million equity forward contract from the February 2023 ASR settled in May 2023.

(3) Excluded the 101,821 shares and $40.0 million equity forward contract from the May 2022 ASR settled in August 2022.

Note 15. Stock-Based Compensation

The compensation cost recognized in the condensed consolidated statements of income for our stock compensation arrangements was as follows:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Cost of products	$	16,732	$	15,318	$	49,656	$	39,603
Cost of maintenance and service	7,765		6,859		22,451		17,335
Research and development expense	75,754		68,243		220,340		175,892
Sales and marketing expense	27,723		22,998		79,567		60,090
General and administrative expense	16,490		14,187		49,935		40,517
Stock-based compensation expense before taxes	144,464		127,605		421,949		333,437
Income tax benefit	(23,172)		(20,940)		(67,681)		(54,717)
Stock-based compensation expense after taxes	$	121,292	$	106,665	$	354,268	$	278,720

During the three and nine months ended July 31, 2023, we recognized stock-based compensation expense relating to restricted stock units (RSUs) granted to senior executives with certain market, performance and service conditions (market-based RSUs). The grant date fair value of the market-based RSUs and the assumptions used in the Monte Carlo simulation model to determine the grant date fair value during the periods were as follows:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023	2022			2023	2022
Expected life (in years)	—	1.41 years			0.90 years - 2.70 years	1.41 years - 1.69 years
Risk-free interest rate	—	2.25		%	4.36% - 4.63%	1.33% - 2.25%
Volatility	—	37.27		%	35.84% - 42.86%	33.01% - 37.27%
Grant date fair value	—	$	355.41		$357.29 - $408.55	$280.82 - $355.41

As of July 31, 2023, we had $1.1 billion of total unrecognized stock-based compensation expense relating to options, RSUs and restricted stock awards, which is expected to be recognized over a weighted-average period of 2.4 years. As of July 31, 2023, we had $48.5 million of unrecognized stock-based compensation expense relating to our Employee Stock Purchase Plan, which is expected to be recognized over a period of approximately 2.0 years.

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


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Intrinsic value of awards exercised	$	94,116	$	86,080	$	212,339	$	245,468

Note 16. Net Income Per Share

We compute basic net income per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the dilution from potential common shares outstanding such as stock options and unvested RSUs and awards during the period using the treasury stock method.

The table below reconciled the weighted average common shares used to calculate basic net income per share with the weighted average common shares used to calculate diluted net income per share:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands, except per share amounts)
Numerator:
Net income attributed to Synopsys	$	336,252	$	222,626	$	880,698	$	831,094
Denominator:
Weighted average common shares for basic net income per share	152,023		152,938		152,204		153,082
Dilutive effect of common share equivalents	2,924		2,868		2,915		3,463
Weighted average common shares for diluted net income per share	154,947		155,806		155,119		156,545
Net income per share attributed to Synopsys:
Basic	$	2.21	$	1.46	$	5.79	$	5.43
Diluted	$	2.17	$	1.43	$	5.68	$	5.31
Anti-dilutive employee stock-based awards excluded	289		336		454		268

Note 17. Segment Disclosure

Segment reporting is based upon the “management approach,” i.e., how management organizes our operating segments for which separate financial information is (1) available and (2) evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance. Our CODM is our CEO.

As described in Note 2. Summary of Significant Accounting Policies and Basis of Presentation of the Notes to Condensed Consolidated Financial Statements, effective in the first quarter of fiscal 2023, we realigned our organizational structure to evaluate the results of our Design IP business separately. Our CODM 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.

The financial information provided to and used by the CODM to assist in making operational decisions, allocating resources, and assessing performance includes consolidated financial information as well as revenue, adjusted operating income, and adjusted operating margin information for the Design Automation, Design IP and Software Integrity segments, accompanied by disaggregated information relating to revenue by geographic region.

Information by reportable segment was as follows:


	Three Months Ended July 31,						Nine Months Ended July 31,
	2023			2022			2023			2022
	(in thousands)
Total Segments:
Revenue	$	1,487,288		$	1,247,766		$	4,243,491		$	3,797,250
Adjusted operating income	524,750			392,127			1,468,644			1,321,671
Adjusted operating margin	35		%	31		%	35		%	35		%
Design Automation:
Revenue	$	1,004,156		$	816,393		$	2,821,570		$	2,438,108
Adjusted operating income	415,652			297,241			1,121,751			911,901
Adjusted operating margin	41		%	36		%	40		%	37		%
Design IP:
Revenue	$	350,234		$	313,034		$	1,029,061		$	1,020,391
Adjusted operating income	86,665			83,630			290,611			373,490
Adjusted operating margin	25		%	27		%	28		%	37		%
Software Integrity:
Revenue	$	132,898		$	118,339		$	392,860		$	338,751
Adjusted operating income	22,433			11,256			56,282			36,280
Adjusted operating margin	17		%	10		%	14		%	11		%

Certain operating expenses are not allocated to the segments and are managed at a consolidated level. The unallocated expenses managed at a consolidated level, including amortization of intangible assets, stock-based compensation, changes in the fair value of deferred compensation plan, restructuring charges, and certain other operating expenses, were presented in the table below to provide a reconciliation of the total adjusted operating income from segments to our consolidated operating income:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Total segment adjusted operating income	$	524,750	$	392,127	$	1,468,644	$	1,321,671
Reconciling items:
Amortization of intangible assets	(25,071)		(26,454)		(74,882)		(70,181)
Stock-based compensation expense	(144,464)		(127,605)		(421,949)		(333,437)
Deferred compensation plan	(21,816)		1,092		(44,845)		50,001
Restructuring charges	(33,385)		—		(78,384)		(12,057)
Other	(4,540)		(5,232)		(9,846)		(11,332)
Total operating income	$	295,474	$	233,928	$	838,738	$	944,665

The CODM does not use total assets by segment to evaluate segment performance or allocate resources. As a result, total assets by segment are not disclosed.

In allocating revenue to particular geographic areas, the CODM considers where individual “seats” or licenses to our products are located. Revenue is defined as revenue from external customers. Revenue related to operations in the United States and other geographic areas were:


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Revenue:
United States	$	640,147	$	575,326	$	1,973,342	$	1,763,541
Europe	145,626		127,288		437,589		376,195
China	304,025		189,138		698,230		617,524
Korea	163,938		125,307		466,546		358,871
Other	233,552		230,707		667,784		681,119
Consolidated	$	1,487,288	$	1,247,766	$	4,243,491	$	3,797,250

Geographic revenue data for multi-regional, multi-product transactions reflect internal allocations and are therefore subject to certain assumptions and to our allocation methodology.

Note 18. Other Income (Expense), Net

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


	Three Months Ended July 31,				Nine Months Ended July 31,
	2023		2022		2023		2022
	(in thousands)
Interest income	$	11,877	$	2,735	$	26,875	$	4,876
Interest expense	(342)		(439)		(918)		(1,339)
Gains (losses) on assets related to deferred compensation plan	21,816		(1,092)		44,845		(50,001)
Foreign currency exchange gains (losses)	26		(376)		352		3,452
Other, net	(7,569)		1,598		(17,801)		1,732
Total	$	25,808	$	2,426	$	53,353	$	(41,280)

Note 19. Income Taxes

Effective Tax Rate

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

The following table presented the provision for income taxes and the effective tax rates:


	Three Months Ended July 31,						Nine Months Ended July 31,
	2023			2022			2023			2022
	(in thousands)
Income before income taxes	$	321,282		$	236,354		$	892,091		$	903,385
Provision (benefit) for income taxes	$	(11,773)		$	16,708		$	20,461		$	76,506
Effective tax rate	(3.7)		%	7.1		%	2.3		%	8.5		%

Our effective tax rate for the nine months ended July 31, 2023 is lower than the statutory federal corporate tax rate of 21% primarily due to U.S. federal research tax credits, foreign-derived intangible income deduction, excess tax benefits from stock-based compensation, U.S. foreign tax credits, and the tax benefit recorded as a result of concluding the Hungary tax litigation, partially offset by state taxes, the effect of non-deductible stock-based compensation, and higher taxes on certain foreign earnings.

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted, which significantly changed prior U.S. tax law and includes numerous provisions that affect our business. Effective our fiscal 2023, the Tax Act requires that research and development expenditures are capitalized and amortized instead of being deducted when

incurred. Domestic research is capitalized over five years and foreign research is capitalized over fifteen years. For fiscal 2023, this will result in a significant increase to our cash tax liabilities and will also decrease our effective tax rate due to increasing the foreign derived intangible income deduction. The impact to our cash tax liabilities will decrease over time as the research and development expenditures are amortized.

Our effective tax rate decreased in the three months ended July 31, 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, higher excess tax benefits from stock-based compensation, and the tax benefit recorded as a result of concluding the Hungary tax litigation. Our effective tax rate decreased for the nine months ended July 31, 2023 as compared to the same period in fiscal 2022, primarily due to higher foreign derived intangible income deduction and the tax benefit recorded as a result of concluding the Hungary tax litigation, offset by lower excess tax benefits from stock-based compensation.

The timing of the resolution of income tax examinations, and the amounts and timing of various tax payments that are part of the settlement process, are highly uncertain. Variations in such amounts and/or timing could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that in the coming 12 months, it is reasonably possible that either certain audits and ongoing tax litigation will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $10 million.

Non-U.S. Examinations

Hungarian Tax Authority

In 2017, the Hungarian Tax Authority (the HTA) assessed withholding taxes of approximately $25.0 million and interest and penalties of $11.0 million against our Hungary subsidiary (Synopsys Hungary). Synopsys Hungary contested the assessment with the Hungarian Administrative Court (Administrative Court). In fiscal 2018, as required under Hungarian law, Synopsys Hungary paid the assessment and in fiscal 2019, recorded a tax expense due to an unrecognized tax benefit of $17.4 million, which is net of estimated U.S. foreign tax credits. The Administrative Court found against Synopsys Hungary, and we appealed to the Hungarian Supreme Court. During 2021, the Hungarian Supreme Court heard our appeal and remanded the case to the Administrative Court for further proceedings. The Administrative Court once again ruled against Synopsys Hungary, and we filed another appeal with the Hungarian Supreme Court. The Hungarian Supreme Court heard our appeal on January 27, 2022, vacated the lower court's decision and remanded the case back to the Administrative Court for further proceedings. Hearings with the Administrative Court were held on June 30, 2022, September 22, 2022 and April 25, 2023. The Administrative Court issued its written decision in favor of Synopsys Hungary on May 17, 2023, and the HTA subsequently refunded Synopsys Hungary the tax, penalty and interest paid in fiscal 2018, as well as additional interest totaling $39.1 million (including foreign currency effects). The HTA had until July 14, 2023, to file an appeal with the Hungarian Supreme Court and the HTA did not appeal. This concludes the litigation. During the third quarter of fiscal 2023, Synopsys released its unrecognized tax benefit and offsetting U.S. foreign tax credits, resulting in a net benefit of $23.8 million.

We are also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations.

Legislative Developments

On August 16, 2022, the Inflation Reduction Act of 2022 (the IR Act) was enacted in the United States. The IR Act includes a 15% minimum tax based primarily on global consolidated U.S. GAAP profits with a $1 billion minimum threshold. The tax takes effect in fiscal 2024, with the $1 billion threshold measured as an average over three years commencing in the current fiscal year. Computation of the tax includes adjustments which, among others, provide for an offset of income taxes paid or accrued in non-U.S. jurisdictions. The details of the computation will be subject to regulations to be issued by the U.S. Department of the Treasury. Synopsys will monitor regulatory developments and will continue to evaluate the impact, if any, of the minimum tax.

The IR Act includes provisions intended to mitigate climate change by, among others, providing tax credit incentives for reductions in greenhouse gas emissions. The details of the implementation of these incentives are subject to regulations to be released by the U.S. Department of the Treasury. Synopsys is monitoring these developments and will continue to evaluate opportunities to utilize these incentives in the future.

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 do not expect a material impact on our overall capital allocation strategy or our consolidated financial statements.

On August 9, 2022, the CHIPS and Science Act of 2022 (the CHIPS Act) was enacted in the United States. The CHIPS Act provides financial incentives to the semiconductor industry which are primarily directed at manufacturing activities within the United States. We are evaluating potential opportunities related to the CHIPS Act.

Note 20. Contingencies

Legal Proceedings

We are subject to routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate outcome of any litigation is often uncertain and unfavorable outcomes could have a negative impact on our results of operations and financial condition. We regularly review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount is estimable, we accrue a liability for the estimated loss. Legal proceedings are inherently uncertain and, as circumstances change, it is possible that the amount of any accrued liability may increase, decrease or be eliminated.

We have determined that, except as set forth below, no disclosure of estimated loss is required for a claim against us because: (1) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (2) a reasonably possible loss or range of loss cannot be estimated; or (3) such estimate is immaterial.

Legal Settlement

There have been no changes to the disclosure related to Mentor Graphics Corporation (now part of Siemens AG) since our Annual Report. See Note 10. Contingencies of the Notes to Consolidated Financial Statements in our Annual Report for further information.

Tax Matters

We undergo examination from time to time by U.S. and foreign authorities for non-income based taxes, such as sales, use and value-added taxes, and are currently under examination by tax authorities in certain jurisdictions. If the potential loss from such examinations is considered probable and the amount or the range of loss could be estimated, we would accrue a liability for the estimated expense.

In addition to the foregoing, we are, from time to time, party to various other claims and legal proceedings in the ordinary course of our business, including with tax and other governmental authorities. For a description of certain of these other matters, see Note 19. Income Taxes of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

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