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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, 2020
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
 
 
 
synopsyslogoa20.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 19, 2020, there were 151,761,689 shares of the registrant’s common stock outstanding.




SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 31, 2020
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, 2020
 
 October 31,
2019*
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,049,922

 
$
728,597

Accounts receivable, net
638,489

 
553,895

Inventories, net
159,813

 
141,518

Income taxes receivable and prepaid taxes
20,960

 
24,855

Prepaid and other current assets
316,831

 
290,052

Total current assets
2,186,015

 
1,738,917

Property and equipment, net
484,529

 
429,532

Operating lease right-of-use assets, net
472,244

 

Goodwill
3,356,407

 
3,171,179

Intangible assets, net
275,338

 
279,374

Long-term prepaid taxes
8,279

 
15,503

Deferred income taxes
463,894

 
390,129

Other long-term assets
416,544

 
380,526

Total assets
$
7,663,250

 
$
6,405,160

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
549,906

 
$
506,459

Operating lease liabilities, current
71,861

 

Accrued income taxes
20,653

 
15,904

Deferred revenue
1,389,609

 
1,212,476

Short-term debt
24,248

 
17,614

Total current liabilities
2,056,277

 
1,752,453

Operating lease liabilities, non-current
470,215

 

Long-term accrued income taxes
27,011

 
29,911

Long-term deferred revenue
111,915

 
90,102

Long-term debt
107,104

 
120,093

Other long-term liabilities
289,411

 
323,725

Total liabilities
3,061,933

 
2,316,284

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

 

Common stock, $0.01 par value: 400,000 shares authorized; 151,758 and 150,331 shares outstanding, respectively
1,519

 
1,503

Capital in excess of par value
1,623,586

 
1,635,455

Retained earnings
3,597,944

 
3,164,144

Treasury stock, at cost: 5,503 and 6,930 shares, respectively
(554,304
)
 
(625,642
)
Accumulated other comprehensive income (loss)
(72,820
)
 
(92,447
)
Total Synopsys stockholders’ equity
4,595,925

 
4,083,013

Non-controlling interest
5,392

 
5,863

Total stockholders’ equity
4,601,317

 
4,088,876

Total liabilities and stockholders’ equity
$
7,663,250

 
$
6,405,160

*
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,
 
2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Time-based products
$
612,065

 
$
537,569

 
$
1,758,601

 
$
1,649,590

Upfront products
210,931

 
177,552

 
491,417

 
451,466

Maintenance and service
141,138

 
137,849

 
409,824

 
408,557

Total revenue
964,134

 
852,970

 
2,659,842

 
2,509,613

Cost of revenue:
 
 
 
 
 
 
 
Products
118,478

 
113,533

 
344,469

 
346,163

Maintenance and service
60,812

 
59,496

 
184,940

 
178,113

Amortization of intangible assets
13,718

 
13,603

 
40,732

 
45,927

Total cost of revenue
193,008

 
186,632

 
570,141

 
570,203

Gross margin
771,126

 
666,338

 
2,089,701

 
1,939,410

Operating expenses:
 
 
 
 
 
 
 
Research and development
322,602

 
284,804

 
939,456

 
846,429

Sales and marketing
156,456

 
157,109

 
455,511

 
471,720

General and administrative
73,516

 
67,382

 
204,734

 
165,794

Amortization of intangible assets
9,931

 
10,111

 
29,545

 
31,211

Restructuring charges
(1,977
)
 
19,338

 
36,446

 
33,746

Total operating expenses
560,528

 
538,744

 
1,665,692

 
1,548,900

Operating income
210,598

 
127,594

 
424,009

 
390,510

Other income (expense), net
26,256

 
5,317

 
22,584

 
23,373

Income before income taxes
236,854

 
132,911

 
446,593

 
413,883

Provision (benefit) for income taxes
(16,057
)
 
32,982

 
(20,299
)
 
42,230

Net income
$
252,911

 
$
99,929

 
$
466,892

 
$
371,653

Net income per share:
 
 
 
 
 
 
 
Basic
$
1.67

 
$
0.67

 
$
3.10

 
$
2.48

Diluted
$
1.62

 
$
0.65

 
$
3.01

 
$
2.42

Shares used in computing per share amounts:
 
 
 
 
 
 
 
Basic
151,352

 
150,123

 
150,731

 
149,708

Diluted
155,973

 
154,600

 
155,074

 
153,859

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,
 
2020
 
2019
 
2020
 
2019
Net income
$
252,911

 
$
99,929

 
$
466,892

 
$
371,653

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
18,102

 
(2,123
)
 
14,099

 
(67
)
Cash flow hedges:
 
 
 
 
 
 
 
Deferred gains (losses), net of tax of $(4,169) and $(1,823), for the three and nine months ended July 31, 2020, respectively, and of $(464) and $(2,178) for each of the same periods in fiscal 2019, respectively.
12,399

 
(1,070
)
 
3,965

 
4,844

Reclassification adjustment on deferred (gains) losses included in net income, net of tax of $(134) and $(262), for the three and nine months ended July 31, 2020, respectively, and of $(702) and $(2,988) for each of the same periods in fiscal 2019, respectively.
709

 
3,260

 
1,563

 
11,747

Other comprehensive income (loss), net of tax effects
31,210

 
67

 
19,627

 
16,524

Comprehensive income
$
284,121

 
$
99,996

 
$
486,519

 
$
388,177

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, 2020
150,908

 
$
1,509

 
$
1,655,787

 
$
3,356,489

 
$
(634,669
)
 
$
(104,030
)
 
$
4,275,086

 
$
5,863

 
$
4,280,949

Net income
 
 
 
 
 
 
252,911

 
 
 
 
 
252,911

 
(471
)
 
252,440

Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
31,210

 
31,210

 
 
 
31,210

Purchases of treasury stock
(149
)
 


 


 
 
 
(20,000
)
 
 
 
(20,000
)
 
 
 
(20,000
)
Equity forward contract
 
 
 
 
20,000

 
 
 


 
 
 
20,000

 
 
 
20,000

Common stock issued, net of shares withheld for employee taxes
999

 
10

 
(114,038
)
 
(11,456
)
 
100,365

 
 
 
(25,119
)
 
 
 
(25,119
)
Stock-based compensation
 
 
 
 
61,837

 
 
 
 
 
 
 
61,837

 
 
 
61,837

Balance at July 31, 2020
151,758

 
$
1,519

 
$
1,623,586

 
$
3,597,944

 
$
(554,304
)
 
$
(72,820
)
 
$
4,595,925

 
$
5,392

 
$
4,601,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at October 31, 2019
150,331

 
$
1,503

 
$
1,635,455

 
$
3,164,144

 
$
(625,642
)
 
$
(92,447
)
 
$
4,083,013

 
$
5,863

 
$
4,088,876

Net income
 
 
 
 
 
 
466,892

 
 
 
 
 
466,892

 
(471
)
 
466,421

Other comprehensive income (loss), net of tax effects
 
 
 
 
 
 
 
 
 
 
19,627

 
19,627

 
 
 
19,627

Purchases of treasury stock
(1,380
)
 
(12
)
 
12

 
 
 
(200,000
)
 
 
 
(200,000
)
 
 
 
(200,000
)
Common stock issued, net of shares withheld for employee taxes
2,807

 
28

 
(182,036
)
 
(33,092
)
 
271,338

 
 
 
56,238

 
 
 
56,238

Stock-based compensation
 
 
 
 
170,155

 
 
 
 
 
 
 
170,155

 
 
 
170,155

Balance at July 31, 2020
151,758

 
$
1,519

 
$
1,623,586

 
$
3,597,944

 
$
(554,304
)
 
$
(72,820
)
 
$
4,595,925

 
$
5,392

 
$
4,601,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

(1) 
See Note 2. Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019 for additional information on the retained earnings adjustment due to adoption of Accounting Standards Codification (ASC) 606 and ASC 340, “Other Assets and Deferred Costs”.
(2) 
See Note 11. Income Taxes in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019 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.


4



SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended 
 July 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
466,892

 
$
371,653

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and depreciation
159,156

 
152,133

Reduction of operating lease right-of-use assets
62,585

 

Amortization of capitalized costs to obtain revenue contracts
44,851

 
46,230

Stock-based compensation
170,155

 
114,826

Allowance for doubtful accounts
14,875

 
8,950

(Gain) loss on sale of property and investments
(1,994
)
 
(4,052
)
Deferred income taxes
(74,374
)
 
(9,664
)
Net changes in operating assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(89,667
)
 
89,370

Inventories
(17,040
)
 
(39,431
)
Prepaid and other current assets
(21,350
)
 
(38,224
)
Other long-term assets
(77,895
)
 
(114,344
)
Accounts payable and accrued liabilities
43,842

 
(45,200
)
Operating lease liabilities
(57,968
)
 

Income taxes
6,128

 
(6,963
)
Deferred revenue
160,966

 
53,980

Net cash provided by operating activities
789,162

 
579,264

Cash flows from investing activities:
 
 
 
Proceeds from sales of long-term investments
2,151

 
6,361

Purchases of long-term investments
(2,762
)
 

Purchases of property and equipment
(120,234
)
 
(122,358
)
Cash paid for acquisitions and intangible assets, net of cash acquired
(201,045
)
 

Capitalization of software development costs
(3,035
)
 
(2,245
)
Net cash used in investing activities
(324,925
)
 
(118,242
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
276,490

 
192,897

Repayment of debt
(284,218
)
 
(520,312
)
Issuances of common stock
123,237

 
107,354

Payments for taxes related to net share settlement of equity awards
(66,985
)
 
(52,309
)
Purchase of equity forward contract

 
(20,000
)
Purchases of treasury stock
(200,000
)
 
(209,185
)
Other

 
(762
)
Net cash used in financing activities
(151,476
)
 
(502,317
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
8,700

 
4,975

Net change in cash, cash equivalents and restricted cash
321,461

 
(36,320
)
Cash, cash equivalents and restricted cash, beginning of year
730,527

 
725,001

Cash, cash equivalents and restricted cash, end of period
$
1,051,988

 
$
688,681

See accompanying notes to unaudited condensed consolidated financial statements.

5



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 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, 2019 as filed with the SEC on December 20, 2019.
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. In addition, the Company has considered the potential impact of the COVID-19 pandemic on the business operations. Although no material impairment or other effects have been identified to date related to the COVID-19 pandemic, there is substantial uncertainty in the nature and degree of its continued effects over time. This uncertainty affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information are known.
Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Fiscal Year End. The Company’s fiscal year generally ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, the Company has a 53-week year. When a 53-week year occurs, the Company includes the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2020 and 2019 are both 52-week years. Fiscal 2020 will end on October 31, 2020. Fiscal 2019 ended on November 2, 2019. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes refer to the closest calendar month end.
Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842),” which supersedes the previous lease requirements in Topic 840. Topic 842 was subsequently amended by several ASUs. The new guidance requires a lessee to recognize a right-of-use (ROU) asset and a lease liability for most operating leases in the consolidated balance sheets. These ASUs also made minor changes to lessor accounting and aligns key aspects of the lessor accounting model with the new

6



revenue recognition guidance. The new standard did not have a material impact on the unaudited condensed consolidated financial statements for arrangements in which the Company is the lessor.
The Company adopted Topic 842 at the beginning of fiscal 2020 using the modified retrospective method without restatement of comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allows the carryforward of historical assessments about (1) lease classification, (2) whether a contract is or contains a lease, and (3) which costs qualify as initial direct costs for leases that existed prior to the adoption. The Company did not elect either the use of hindsight or land easements practical expedients available in transition.
The adoption of the standard did not have an impact on the Company’s beginning retained earnings, results of operations, or cash flows. The operating lease liabilities equaled the present value of the remaining Topic 840 minimum rental payments for those leases, discounted at the Company’s incremental borrowing rate as of the date of adoption. The ROU assets were measured at the amount of the related lease liabilities plus any prepaid rental payments and less any unamortized lease incentives such as tenant improvement allowances. The Company recognized ROU assets of $475 million and operating lease liabilities of $540 million on the unaudited condensed consolidated balance sheets.
The Company determines if a contract is or contains a lease at inception. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments arising from the lease. Lease liabilities for operating and finance leases are recognized at the lease commencement date based on the present value of future lease payments over the remaining lease terms. ROU assets are derived from the carrying amount of the related lease liability plus any prepaid lease payments, less any lease incentives such as tenant improvement allowances. The Company primarily uses its incremental borrowing rate, determined as of the lease commencement date, to measure the present value of its future lease payments, as the rate implicit in the lease is generally not readily determinable. The Company uses a benchmark senior unsecured yield curve for debt instruments and considers specific credit quality, market conditions, tenor of lease arrangements, and quality of collateral to determine the incremental borrowing rate.
Operating lease expense is recognized on a straight-line basis over the lease term of each lease. Variable payments, such as for maintenance, property taxes or insurance, are recognized on our unaudited condensed consolidated statements of operations as incurred.
The Company has adopted both (1) the practical expedient to not separate lease from non-lease components and (2) the short-term lease exemption. The Company has elected the practical expedient to not separate lease from non-lease components for all classes of underlying assets and the short-term lease exemption for all classes of underlying assets except real estate leases, with terms 12 months or less.
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC 606), “Revenue from Contracts with Customers,” which the Company adopted in fiscal 2019. See Note 2. Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019 for revenue recognition policies under the new revenue guidance ASC 606.
Note 3. Revenue
Disaggregated Revenue
The following table shows the percentage of revenue by product groups:
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020
 
2019
 
2020
 
2019
EDA
55
%
 
57
%
 
58
%
 
59
%
IP & System Integration
35
%
 
33
%
 
32
%
 
31
%
Software Integrity Products & Services
10
%
 
10
%
 
10
%
 
10
%
Other
0
%
 
0
%
 
0
%
 
0
%
Total
100
%
 
100
%
 
100
%
 
100
%

Contract Balances
The contract assets indicated below are presented as prepaid and other current assets in the unaudited condensed consolidated balance sheets. The contract assets are transferred to receivables when the rights to invoice and

7



receive payment become unconditional. Unbilled receivables are presented as accounts receivable, net, in the unaudited condensed consolidated balance sheets.
Contract balances are as follows:
 
As of
 
July 31, 2020
 
October 31, 2019
 
(in thousands)
Contract assets
$
216,516

 
$
210,557

Unbilled receivables
$
53,028

 
$
38,175

Deferred revenue
$
1,501,524

 
$
1,302,578


During the nine months ended July 31, 2020, the Company recognized $926.2 million of revenue that was included in the deferred revenue balance as of October 31, 2019. During the nine months ended July 31, 2019, the Company recognized $785.1 million of revenue that was included in the deferred revenue balance as of October 31, 2018.
Contracted but unsatisfied or partially unsatisfied performance obligations were approximately $4.6 billion as of July 31, 2020, which includes $604.6 million 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. The Company has elected to exclude future sales-based royalty payments from the remaining performance obligations. The contracted but unsatisfied or partially unsatisfied performance obligations expected to be recognized over the next 12 months are approximately 58%, with the remainder recognized thereafter.
During the three and nine months ended July 31, 2020, the Company recognized $25.9 million and $78.0 million, respectively, from performance obligations satisfied from sales-based royalties earned during the periods. During the three and nine months ended July 31, 2019, the Company recognized $17.5 million and $64.8 million, respectively, from performance obligations satisfied from sales-based royalties earned during the periods.
Costs of Obtaining a Contract with Customer
The incremental costs of obtaining a contract with a customer, which consist primarily of direct sales commissions earned upon execution of the contract, are required to be capitalized under ASC 340-40 and amortized over the estimated period of which the benefit is expected to be received. As direct sales commissions paid for renewals are commensurate with the amounts paid for initial contracts, the deferred incremental costs will be recognized over the contract term. Total capitalized direct commission costs as of July 31, 2020 were $92.1 million and included in other assets in the Company’s unaudited condensed consolidated balance sheets. Amortization of these assets was $16.6 million and $44.9 million during the three and nine months ended July 31, 2020, respectively, and included in sales and marketing expense in the Company’s unaudited condensed consolidated statements of operations. Amortization of these assets was $17.8 million and $46.2 million during the three and nine months ended July 31, 2019, respectively, and included in sales and marketing expense in the Company’s unaudited condensed consolidated statements of operations.
Note 4. Business Combinations
During the nine months ended July 31, 2020, the Company completed several acquisitions for an aggregate consideration of $238.3 million, net of cash acquired as described below:
During the second quarter of fiscal 2020, the Company completed an acquisition for an aggregate consideration of $105.7 million; including cash consideration of $75.7 million and $30.0 million equal to the fair value of the Company’s products exchanged in connection with the acquisition.

8



The consideration of $105.7 million was allocated to $20.6 million of identifiable intangible assets, $4.2 million of net tangible assets, and $80.9 million in goodwill, on a preliminary basis. The fair value of these intangible assets was estimated using the income method. These transactions are not considered to be material to the Company’s unaudited condensed consolidated statements of operations. The acquisition was attributable to the Semiconductor & System Design reporting segment.
Concurrent to this transaction, the Company also executed a design service arrangement and recognized an asset of $10.7 million for the off-market component. The $10.7 million contract asset is expected to be amortized over the contractual period of the agreement of five years.
In addition to the above, the Company also completed several other acquisitions for an aggregate cash consideration of $132.6 million, net of cash acquired. The preliminary purchase allocations are $44.7 million of identifiable intangible assets and $92.4 million in goodwill, of which $12.9 million is attributable to the Software Integrity reporting segment. The fair value of these intangible assets and goodwill are estimated using the income method.    
The preliminary fair value estimates for the assets acquired and liabilities assumed for all acquisitions completed within 12 months from the applicable acquisition date are not yet finalized and may change as additional information becomes available during the respective measurement periods. The primary areas of those preliminary estimates relate to certain tangible assets and liabilities, identifiable intangible assets, and income taxes.
The Company does not consider these acquisitions to be material, individually or in the aggregate, to the Company’s unaudited condensed consolidated statements of operations.
Note 5. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during the nine months ended July 31, 2020 were as follows:
 
(in thousands)
Balance at October 31, 2019
$
3,171,179

Additions
173,341

Effect of foreign currency translation
11,887

Balance at July 31, 2020
$
3,356,407


Intangible Assets
In-process research and development (IPR&D) as of July 31, 2020 consisted of acquired projects that, if completed, will be reclassified to core/developed technology upon completion, or if abandoned, will be written off. Intangible assets as of July 31, 2020 consisted of the following:
 
Gross Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
827,232

 
$
692,545

 
$
134,687

Customer relationships
380,817

 
268,574

 
112,243

Contract rights intangible
192,757

 
185,357

 
7,400

Trademarks and trade names
43,096

 
28,070

 
15,026

In-process research and development (IPR&D)
1,214

 

 
1,214

Capitalized software development costs
43,112

 
38,344

 
4,768

Total
$
1,488,228

 
$
1,212,890

 
$
275,338



9



Intangible assets as of October 31, 2019 consisted of the following:
 
Gross Assets
 
Accumulated
Amortization
 
Net Assets
 
(in thousands)
Core/developed technology
$
791,647

 
$
655,119

 
$
136,528

Customer relationships
358,661

 
242,058

 
116,603

Contract rights intangible
184,304

 
181,124

 
3,180

Trademarks and trade names
42,929

 
25,581

 
17,348

In-process research and development (IPR&D)
1,200

 

 
1,200

Capitalized software development costs
40,077

 
35,562

 
4,515

Total
$
1,418,818

 
$
1,139,444

 
$
279,374


Amortization expense related to intangible assets consisted of the following:
 
Three Months Ended 
 July 31,
 
Nine Months Ended 
 July 31,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Core/developed technology
$
12,472

 
$
12,825

 
$
37,515

 
$
43,229

Customer relationships
8,971

 
9,303

 
26,444

 
28,261

Contract rights intangible
1,272

 
808

 
3,829

 
2,790

Trademarks and trade names
934

 
778

 
2,489

 
2,858

Capitalized software development costs(1)
947

 
700

 
2,782

 
2,207

Total
$
24,596

 
$
24,414

 
$
73,059

 
$
79,345


(1) Amortization of capitalized software development costs is included in cost of products revenue in the unaudited condensed consolidated statements of operations.
The following table presents the estimated future amortization of intangible assets as of July 31, 2020:
Fiscal year
(in thousands)
Remainder of fiscal 2020
$
22,033

2021
75,568

2022
60,735

2023
44,733

2024
34,398

2025 and thereafter
36,657

IPR&D
1,214

Total
$