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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO
COMMISSION FILE NUMBER: 000-19807
 
 
 
synopsyslogoa07a01a20.jpg
SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
56-1546236
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
690 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices, including zip code)
(650) 584-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
($0.01 par value)
SNPS
Nasdaq Global Select Market
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý
As of August 21, 2019, there were 150,286,586 shares of the registrant’s common stock outstanding.





SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 31, 2019
TABLE OF CONTENTS
 
 
 
 
 
Page
PART I.
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.





PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
 
Financial Statements
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
 
July 31, 2019
 
 October 31,
2018*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
686,780

 
$
723,115

Accounts receivable, net
457,390

 
554,217

Inventories
155,108

 
122,407

Income taxes receivable and prepaid taxes
29,751

 
76,525

Prepaid and other current assets
288,616

 
67,533

Total current assets
1,617,645

 
1,543,797

Property and equipment, net
372,566

 
309,310

Goodwill
3,143,056

 
3,143,249

Intangible assets, net
283,305

 
360,404

Long-term prepaid taxes
13,973

 
138,312

Deferred income taxes
339,354

 
404,166

Other long-term assets
383,509

 
246,736

Total assets
$
6,153,408

 
$
6,145,974

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
471,629

 
$
578,326

Accrued income taxes
3,175

 
27,458

Deferred revenue
1,138,993

 
1,152,862

Short-term debt
16,653

 
343,769

Total current liabilities
1,630,450

 
2,102,415

Long-term accrued income taxes
27,847

 
50,590

Long-term deferred revenue
91,229

 
116,859

Long-term debt
125,285

 
125,535

Other long-term liabilities
338,928

 
265,560

Total liabilities
2,213,739

 
2,660,959

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

 

Common stock, $0.01 par value: 400,000 shares authorized; 150,373 and 149,265 shares outstanding, respectively
1,504

 
1,493

Capital in excess of par value
1,597,629

 
1,644,830

Retained earnings
3,003,430

 
2,543,688

Treasury stock, at cost: 6,888 and 7,996 shares, respectively
(572,104
)
 
(597,682
)
Accumulated other comprehensive income (loss)
(96,653
)
 
(113,177
)
Total Synopsys stockholders’ equity
3,933,806

 
3,479,152

Non-controlling interest
5,863

 
5,863

Total stockholders’ equity
3,939,669

 
3,485,015

Total liabilities and stockholders’ equity
$
6,153,408

 
$
6,145,974

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

1



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Time-based products
$
537,569

 
$
570,053

 
$
1,649,590

 
$
1,697,756

Upfront products
177,552

 
99,579

 
451,466

 
291,143

Maintenance and service
137,849

 
110,082

 
408,557

 
337,077

Total revenue
852,970

 
779,714

 
2,509,613

 
2,325,976

Cost of revenue:
 
 
 
 
 
 
 
Products
113,533

 
115,437

 
346,163

 
335,030

Maintenance and service
59,496

 
49,790

 
178,113

 
150,674

Amortization of intangible assets
13,603

 
20,154

 
45,927

 
59,612

Total cost of revenue
186,632

 
185,381

 
570,203

 
545,316

Gross margin
666,338

 
594,333

 
1,939,410

 
1,780,660

Operating expenses:
 
 
 
 
 
 
 
Research and development
284,804

 
277,402

 
846,429

 
793,947

Sales and marketing
157,109

 
157,953

 
471,720

 
455,653

General and administrative
67,382

 
84,336

 
165,794

 
199,517

Amortization of intangible assets
10,111

 
10,651

 
31,211

 
30,926

Restructuring
19,338

 
23

 
33,746

 
1,917

Total operating expenses
538,744

 
530,365

 
1,548,900

 
1,481,960

Operating income
127,594

 
63,968

 
390,510

 
298,700

Other income (expense), net
5,317

 
7,925

 
23,373

 
12,595

Income before income taxes
132,911

 
71,893

 
413,883

 
311,295

Provision (benefit) for income taxes
32,982

 
(7,516
)
 
42,230

 
133,105

Net income
$
99,929

 
$
79,409

 
$
371,653

 
$
178,190

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.67

 
$
0.53

 
$
2.48

 
$
1.20

Diluted
$
0.65

 
$
0.52

 
$
2.42

 
$
1.16

Shares used in computing per share amounts:
 
 
 
 
 
 
 
Basic
150,123

 
148,490

 
149,708

 
148,760

Diluted
154,600

 
152,614

 
153,859

 
153,118

See accompanying notes to unaudited condensed consolidated financial statements.


2



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
99,929

 
$
79,409

 
$
371,653

 
$
178,190

Other comprehensive income:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(2,123
)
 
(18,231
)
 
(67
)
 
(8,273
)
Cash flow hedges:
 
 
 
 
 
 
 
Deferred gains (losses), net of tax of $(464) and $(2,178), for the three and nine months ended July 31, 2019, respectively, and of $2,518 and $1,363 for each of the same periods in fiscal 2018, respectively.
(1,070
)
 
(12,371
)
 
4,844

 
(7,891
)
Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(702) and $(2,988), for the three and nine months ended July 31, 2019 respectively, and of $247 and $2,767 for each of the same periods in fiscal 2018, respectively.
3,260

 
(1,662
)
 
11,747

 
(12,510
)
Other comprehensive income (loss), net of tax effects
67

 
(32,264
)
 
16,524

 
(28,674
)
Comprehensive income
$
99,996

 
$
47,145

 
$
388,177

 
$
149,516

See accompanying notes to unaudited condensed consolidated financial statements.


3



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(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, 2019
149,982

 
$
1,500

 
$
1,659,484

 
$
2,912,811

 
$
(567,503
)
 
$
(96,720
)
 
$
3,909,572

 
$
5,863

 
$
3,915,435

Net income
 
 
 
 
 
 
99,929

 
 
 
 
 
99,929

 
 
 
99,929

Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
67

 
67

 
 
 
67

Purchases of treasury stock
(775
)
 
(8
)
 
8

 
 
 
(100,000
)
 
 
 
(100,000
)
 
 
 
(100,000
)
Common stock issued, net of shares withheld for employee taxes
1,166

 
12

 
(101,310
)
 
(9,310
)
 
95,399

 
 
 
(15,209
)
 
 
 
(15,209
)
Stock-based compensation
 
 
 
 
39,447

 
 
 
 
 
 
 
39,447

 
 
 
39,447

Balance at July 31, 2019
150,373

 
$
1,504

 
$
1,597,629

 
$
3,003,430

 
$
(572,104
)
 
$
(96,653
)
 
$
3,933,806

 
$
5,863

 
$
3,939,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at October 31, 2018
149,265

 
$
1,493

 
$
1,644,830

 
$
2,543,688

 
$
(597,682
)
 
$
(113,177
)
 
$
3,479,152

 
$
5,863

 
$
3,485,015

Net income
 
 
 
 
 
 
371,653

 
 
 
 
 
371,653

 
 
 
371,653

Retained earnings adjustment due to adoption of accounting standards related to revenue(1)
 
 
 
 
 
 
257,594

 
 
 
 
 
257,594

 
 
 
257,594

Retained earnings adjustment due to adoption of an accounting standard related to income taxes(2)
 
 
 
 
 
 
(130,544
)
 
 
 
 
 
(130,544
)
 
 
 
(130,544
)
Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
16,524

 
16,524

 
 
 
16,524

Purchases of treasury stock
(1,901
)
 
(19
)
 
19

 
 
 
(209,185
)
 
 
 
(209,185
)
 
 
 
(209,185
)
Equity forward contract
 
 
 
 
(20,000
)
 
 
 
 
 
 
 
(20,000
)
 
 
 
(20,000
)
Common stock issued, net of shares withheld for employee taxes
3,009

 
30

 
(140,841
)
 
(38,961
)
 
234,763

 
 
 
54,991

 
 
 
54,991

Stock-based compensation
 
 
 
 
113,621

 
 
 
 
 
 
 
113,621

 
 
 
113,621

Balance at July 31, 2019
150,373

 
$
1,504

 
$
1,597,629

 
$
3,003,430

 
$
(572,104
)
 
$
(96,653
)
 
$
3,933,806

 
$
5,863

 
$
3,939,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 30, 2018
148,961

 
$
1,490

 
$
1,678,921

 
$
2,223,287

 
$
(585,016
)
 
$
(62,389
)
 
$
3,256,293

 
$
4,104

 
$
3,260,397

Net income
 
 
 
 
 
 
79,409

 
 
 
 
 
79,409

 
 
 
79,409

Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
(32,264
)
 
(32,264
)
 
 
 
(32,264
)
Purchases of treasury stock
(1,509
)
 
(15
)
 
15

 
 
 
(132,000
)
 
 
 
(132,000
)
 
 
 
(132,000
)
Equity forward contract
 
 
 
 
(33,000
)
 
 
 
 
 
 
 
(33,000
)
 
 
 
(33,000
)
Common stock issued, net of shares withheld for employee taxes
1,104

 
11

 
(91,580
)
 
(6,150
)
 
80,483

 
 
 
(17,236
)
 
 
 
(17,236
)
Stock-based compensation
 
 
 
 
36,937

 
 
 
 
 
 
 
36,937

 
 
 
36,937

Non-controlling interest in an equity investment
 
 
 
 
 
 
 
 
 
 
 
 

 
1,759

 
1,759

Balance at July 31, 2018
148,556

 
$
1,486

 
$
1,591,293

 
$
2,296,546

 
$
(636,533
)
 
$
(94,653
)
 
$
3,158,139

 
$
5,863

 
$
3,164,002

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at October 31, 2017
150,445

 
$
1,505

 
$
1,622,429

 
$
2,143,873

 
$
(426,208
)
 
$
(65,979
)
 
$
3,275,620

 
$
4,104

 
$
3,279,724

Net income
 
 
 
 
 
 
178,190

 
 
 
 
 
178,190

 
 
 
178,190

Retained earnings adjustment due to adoption of an accounting standard in reclassification of certain tax effects from accumulated other comprehensive income (loss)
 
 
 
 
 
 
(293
)
 
 
 
 
 
(293
)
 
 
 
(293
)
Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
(28,674
)
 
(28,674
)
 
 
 
(28,674
)
Purchases of treasury stock
(4,412
)
 
(44
)
 
44

 
 
 
(387,000
)
 
 
 
(387,000
)
 
 
 
(387,000
)
Equity forward contract
 
 
 
 
(13,000
)
 
 
 
 
 
 
 
(13,000
)
 
 
 
(13,000
)
Common stock issued, net of shares withheld for employee taxes
2,523

 
25

 
(119,879
)
 
(25,224
)
 
176,675

 
 
 
31,597

 
 
 
31,597

Stock-based compensation
 
 
 
 
101,699

 
 
 
 
 
 
 
101,699

 
 
 
101,699

Non-controlling interest in an equity investment
 
 
 
 
 
 
 
 
 
 
 
 

 
$
1,759

 
1,759

Balance at July 31, 2018
148,556

 
$
1,486

 
$
1,591,293

 
$
2,296,546

 
$
(636,533
)
 
$
(94,653
)
 
$
3,158,139

 
$
5,863

 
$
3,164,002


(1) See Note 2. Summary of Significant Accounting Policies for additional information on the retained earnings adjustment due to adoption of Accounting Standards Codification (ASC) 606 and ASC 340.

4



(2) See Note 14. Taxes for additional information on the retained earnings adjustment due to adoption of Accounting Standard Update (ASU) 2016-16.
See accompanying notes to unaudited condensed consolidated financial statements.


5



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended 
 July 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
371,653

 
$
178,190

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and depreciation
152,133

 
150,245

Amortization of capitalized costs to obtain revenue contracts
46,230

 

Stock compensation
114,826

 
102,540

Allowance for doubtful accounts
8,950

 
3,368

(Gain) loss on sale of property and investments
(4,052
)
 
(93
)
Deferred income taxes
(9,664
)
 
5,509

Net changes in operating assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
89,370

 
(41,695
)
Inventories
(39,431
)
 
(48,440
)
Prepaid and other current assets
(38,224
)
 
(9,766
)
Other long-term assets
(114,344
)
 
(31,652
)
Accounts payable and accrued liabilities
(45,200
)
 
(56,491
)
Income taxes
(6,963
)
 
(35,014
)
Deferred revenue
53,980

 
76,780

Net cash provided by operating activities
579,264

 
293,481

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

 
12,449

Proceeds from sales of long-term investments
6,361

 
494

Purchases of long-term investments

 
(645
)
Proceeds from sales of property and equipment

 
1,662

Purchases of property and equipment
(122,358
)
 
(70,469
)
Cash paid for acquisitions and intangible assets, net of cash acquired

 
(646,687
)
Capitalization of software development costs
(2,245
)
 
(2,714
)
Net cash used in investing activities
(118,242
)
 
(705,910
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
192,897

 
615,000

Repayment of debt
(520,312
)
 
(137,500
)
Issuances of common stock
107,354

 
72,722

Payments for taxes related to net share settlement of equity awards
(52,309
)
 
(42,636
)
Purchase of equity forward contract
(20,000
)
 
(33,000
)
Purchases of treasury stock
(209,185
)
 
(367,000
)
Other
(762
)
 
1,759

Net cash (used in) provided by financing activities
(502,317
)
 
109,345

Effect of exchange rate changes on cash, cash equivalents and restricted cash
4,975

 
(3,826
)
Net change in cash, cash equivalents and restricted cash
(36,320
)
 
(306,910
)
Cash, cash equivalents and restricted cash, beginning of period
725,001

 
1,050,075

Cash, cash equivalents and restricted cash, end of period
$
688,681

 
$
743,165

See accompanying notes to unaudited condensed consolidated financial statements.

6



SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Synopsys, Inc. (Synopsys or the Company) provides products and services used by designers 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. The Company is a global leader in supplying the electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. The Company also offers 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. The Company provides software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. To complement these offerings, the Company provides technical services and support to help its customers develop advanced chips and electronic systems. These products and services are part of the Company’s Semiconductor & System Design segment.
The Company is also a leading provider of software tools and services that improve the security and quality of software code in a wide variety of industries, including electronics, financial services, media, automotive, medicine, energy and industrials. These tools and services are part of the Company’s Software Integrity segment.

Note 2. Summary of Significant Accounting Policies
The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its unaudited condensed consolidated balance sheets, results of operations, comprehensive income, stockholders' equity and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in Synopsys’ Annual Report on Form 10-K for the fiscal year ended October 31, 2018 as filed with the SEC on December 17, 2018.
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 unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position.
Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany accounts and transactions have been eliminated.
Fiscal Year End. The Company’s fiscal year generally ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that every five or six years, the Company has a 53-week year. When a 53-week year occurs, the Company includes the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2019 is a 52-week year and will end on November 2, 2019. Fiscal 2018 was a 53-week year and ended on November 3, 2018.
The results of operations for the first nine months of fiscal 2019 and 2018 included 39 weeks and 40 weeks, respectively, and ended on August 3, 2019 and August 4, 2018, respectively. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Segment Reporting. Effective in fiscal 2019, the Company realigned its business to evaluate the results of its Software Integrity business separately from Synopsys’ traditional electronic design automation (EDA) and semiconductor IP business. The Chief Operating Decision Makers (CODMs) now regularly review disaggregated information for the following two reportable segments: (1) Semiconductor & System Design, which includes EDA tools, IP products, system integration solutions and associated services, and (2) Software Integrity, which includes security and quality solutions for software development across many industries. Synopsys' CODMs are its two co-

7



Chief Executive Officers. Historical segment disclosures have been recast to retrospectively reflect the change from one to two reportable segments.
Goodwill. Effective in the first quarter of fiscal 2019, with the change in the Company’s reportable segments, the Company has determined there are now two reporting units, requiring goodwill to be allocated to the two reporting units using a relative fair value method. Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and identifiable intangible assets acquired by the Company. The carrying amount of goodwill at each reporting unit is tested for impairment annually as of October 31, or more frequently if facts and circumstances warrant a review. As a result of changes to the Company's segment reporting, the Company conducted a quantitative impairment test for each of its reporting units and concluded that there was no impairment. The Company performs either a qualitative or quantitative analysis when testing a reporting unit’s goodwill for impairment. A qualitative goodwill impairment test is performed when the fair value of a reporting unit historically has significantly exceeded the carrying value of its net assets and based on current operations is expected to continue to do so. Otherwise, the Company is required to conduct a quantitative impairment test for each reporting unit and estimates the fair value of each reporting unit using a combination of a discounted cash flow analysis and a market approach based on market multiples. The discount rate used in an income approach is based on the Company's weighted-average cost of capital and may be adjusted for the relevant risks pertaining to projecting future cash flows. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded for the difference. Refer to Note 3. Goodwill and Intangible Assets for a discussion of the change in reporting units as related to the realignment of the Company’s segments.
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC 606), "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in “Revenue Recognition (ASC 605).” The new guidance creates a single, principle-based model for revenue recognition that is intended to expand and improve companies' revenue disclosures. For revenue recognition policies under ASC 605, refer to Note 2 - Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended October 31, 2018.
ASC 606 requires a company to recognize revenue when goods are transferred or services are provided to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. ASC 606 also requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to ASC 606, including amendments that deferred the initially proposed adoption date and clarified accounting for licenses of intellectual property and identifying performance obligations.
The Company adopted ASC 606 at the beginning of fiscal 2019 using the modified retrospective transition method. Under this method, periods prior to the adoption date are not adjusted and continue to be reported under the revenue accounting literature in effect during those periods. The Company evaluated contracts that were in effect at the beginning of fiscal 2019 as if they had been accounted for under ASC 606 from the contract inception and summarized the most significant adoption impacts as follows:
Revenue for certain ongoing contracts that was previously deferred would have been recognized in the periods prior to adoption under ASC 606. Therefore, upon adoption, the Company recorded the following adjustments to the beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts: an increase to retained earnings of $265.1 million, a decrease to unbilled receivables of $27.4 million, an increase to contract assets of $126.9 million, and a decrease in deferred revenue of $165.6 million.
The Company capitalized $73.8 million of incremental costs for obtaining contracts with customers at the adoption date with a corresponding adjustment to retained earnings and is amortizing these costs over the contract term.
The Company recorded an increase in its opening deferred tax liability of $81.4 million, with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments.

8



The impacts of adopting ASC 606 on the Company's unaudited condensed consolidated financial statements for the nine months ended July 31, 2019 are summarized in the tables below.
Balance Sheet Accounts
The following table summarizes the effects of adopting ASC 606 on certain account balances of the unaudited condensed consolidated balance sheet that were impacted as of July 31, 2019:
 
As reported under ASC 606
 
Adjustments
 
Adjusted balance under ASC 605
 
(in thousands)
Receivables, net
$
457,390

 
$
64,122

 
$
521,512

Prepaid and other current assets
288,616

 
(205,822
)
 
82,794

Deferred income taxes
339,354

 
76,891

 
416,245

Other long-term assets
383,509

 
(94,626
)
 
288,883

Accounts payable and other accrued liabilities
471,629

 
(10,413
)
 
461,216

Deferred revenue
1,138,993

 
132,450

 
1,271,443

Long-term deferred revenue
91,229

 
41,585

 
132,814

Other long-term liabilities (1)
338,928

 
(16,671
)
 
322,257

Retained earnings
3,003,430

 
(306,386
)
 
2,697,044

(1) Includes long-term deferred tax liabilities.
Statements of Operations
The following table summarizes the effects of adopting ASC 606 on the unaudited condensed consolidated statements of operations for the three and nine months ended July 31, 2019:

9



 
Three Months Ended 
 July 31, 2019
 
Nine Months Ended 
 July 31, 2019
 
As reported under ASC 606
 
Adjustments
 
Adjusted under ASC 605
 
As reported under ASC 606
 
Adjustments
 
Adjusted under ASC 605
 
(in thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
    Time-based products
$
537,569

 
$
55,604

 
$
593,173

 
$
1,649,590

 
$
158,222

 
$
1,807,812

    Upfront products
177,552

 
(73,267
)
 
104,285

 
451,466

 
(151,110
)
 
300,356

    Maintenance and service
137,849

 
(26,914
)
 
110,935

 
408,557

 
(57,707
)
 
350,850

Total revenue
852,970

 
(44,577
)
 
808,393

 
2,509,613

 
(50,595
)
 
2,459,018

Cost of Revenue:
 
 
 
 


 
 
 
 
 


    Products
113,533

 

 
113,533

 
346,163

 

 
346,163

    Maintenance and service
59,496

 

 
59,496

 
178,113

 

 
178,113

Amortization of intangible assets
13,603

 

 
13,603

 
45,927

 

 
45,927

Total cost of revenue
186,632

 

 
186,632

 
570,203

 

 
570,203

Gross margin
666,338

 
(44,577
)
 
621,761

 
1,939,410

 
(50,595
)
 
1,888,815

Operating expenses:
 
 
 
 


 
 
 
 
 


Research and development
284,804

 

 
284,804

 
846,429

 

 
846,429

    Sales and marketing
157,109

 
(2,731
)
 
154,378

 
471,720

 
10,395

 
482,115

General and administrative
67,382

 

 
67,382

 
165,794

 

 
165,794

Amortization of intangible assets
10,111

 

 
10,111

 
31,211

 

 
31,211

Restructuring
19,338

 

 
19,338

 
33,746

 

 
33,746

Total operating expenses
538,744

 
(2,731
)
 
536,013

 
1,548,900

 
10,395