Management Discussion

Synopsys Inc · 10-K · FY 2022

● SYNOPSYS INC · FY 2022

The company reported strong execution in fiscal 2022, achieving a 21% increase in total revenue and a 58% increase in operating income, supported by a multi-pronged growth strategy. However, management's communication regarding future uncertainty is highly cautious, qualifying forward-looking statements with repeated references to global macroeconomic instability and export controls. The assessment notes that while the company is transparent about complex accounting judgments, its proposed mitigation strategies are often presented as passive or reactive.

SNPS L1 Synthesis

● SYMBOLOGY.ONLINE l1 SYNTHESIS

Synopsys Inc Management Discussion Analysis

Assessment of Management Leadership Based on MD&A

The management team demonstrates a high degree of technical financial literacy and operational detail, but their communication regarding future uncertainty is highly cautious, which can be interpreted as both a strength (thoroughness) and a weakness (potential for over-qualification).

1. Transparency and Honesty in Discussing Challenges

Strength: The management is highly transparent regarding the complexity of their revenue streams and accounting judgments. They explicitly detail the significant judgment required for revenue recognition (e.g., distinguishing between distinct and combined performance obligations in TSL contracts and IP licensing) and acknowledge that "Our actual results may differ from these estimates."
Weakness: While transparent about risks, the discussion of macroeconomic challenges is often vague and generalized. When discussing the impact of global uncertainty, they state that the negative impact "may be deferred due to our business model," which, while technically true, minimizes the immediate concern of customers postponing spending. Furthermore, the discussion of the Hungarian tax dispute, while detailed, is presented as a historical legal battle rather than a clear, actionable lesson learned for future financial planning.

2. Strategic Thinking and Forward Planning

Strength: The company outlines a clear, multi-pronged growth strategy: "maintaining and building on our leadership in our EDA products, expanding and proliferating our IP offerings, driving growth in the software security and quality market, and continuing to expand our product portfolio and our total addressable market." They also provide detailed, quantitative forecasts for revenue growth (e.g., 21% total revenue increase in FY2022) and segment growth, indicating structured planning.
Weakness: The forward-looking statements are heavily qualified by uncertainty. Regarding the macro environment, they repeatedly state that the impact of global events "remain uncertain" and that they "cannot forecast the scope or timing of such changes" (referencing export controls). This suggests that while they have a strategy, the management acknowledges a significant lack of predictive certainty regarding external forces.

3. Execution Capabilities Based on Past Performance

Strength: The financial results demonstrate strong execution. The company achieved a 21% increase in total revenue and a 58% increase in operating income for fiscal 2022 compared to fiscal 2021, with the increase in operating income exceeding the growth in costs and expenses. They attribute this success to "solid execution, leading technologies and strong customer relationships."
Weakness: The management also highlights the inherent variability in their revenue model, noting that "decreases as well as increases in customer spending do not immediately affect our revenues in a significant way" due to the time-based nature of revenue recognition. While this explains the stability, it also signals a lack of direct correlation between immediate customer spending fluctuations and current revenue, which could be viewed as a weakness in immediate market responsiveness.

4. Risk Awareness and Mitigation Strategies

Strength: The management is highly aware of geopolitical and regulatory risks, dedicating significant space to the impact of U.S. export control regulations and the general volatility from global inflation, interest rates, and trade regulations. They proactively state that they "will continue to monitor such developments" and refer readers to the detailed risk factors in Item 1A.
Weakness: The mitigation strategies presented are often passive or reactive. For instance, regarding the export controls, they state, "Based on our current understanding, we believe these regulations will not have a material impact on our business," which is a statement of belief rather than a concrete, tested mitigation plan. Furthermore, the discussion of the COVID-19 pandemic is largely descriptive of past minor disruptions, without detailing specific, proactive operational changes implemented to mitigate future, severe global health crises.

● SYNOPSYS INC · FY 2022

Management Discussion

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following overview is qualified in its entirety by the more complete discussion contained in this Item 7, the risk factors set forth in Item 1A of this Form 10-K, and our consolidated financial statements and the notes thereto set forth in Item 8 of this Form 10-K. Please also see the cautionary language at the beginning of Part I of this Form 10-K regarding forward-looking statements.

Business Summary

Synopsys provides products and services used across the entire Silicon to Software spectrum, from engineers creating advanced semiconductors to product teams developing advanced electronic systems to software developers seeking to ensure the security and quality of their code. We are a global leader in electronic design automation (EDA) software that engineers use to design and test integrated circuits (ICs), also known as chips. We also offer semiconductor intellectual property (IP) products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. We provide software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. We also provide technical services and support to help our customers develop advanced chips and electronic systems. These products and services are part of our Semiconductor & System Design segment.

We are also a leading provider of software tools and services that improve the security, quality and compliance of software in a wide variety of industries, including electronics, financial services, automotive, medicine, energy and industrials. These tools and services are part of our Software Integrity segment.

Our EDA and IP customers are generally semiconductor and electronics systems companies. Our solutions help these companies overcome the challenges of developing increasingly advanced electronics products while also helping them reduce their design and manufacturing costs. While our products are an important part of our customers' development process, our sales could be affected based on their research and development budgets, and our customers' spending decisions may be affected by their business outlook and willingness to invest in new and increasingly complex chip designs.

Our Software Integrity segment delivers products and services that enable software developers to test their code - while it is being written - for known security vulnerabilities and quality defects, as well as testing for open source security vulnerabilities and license compliance. Our Software Integrity customers are software developers across many industries, including, but also well beyond, the semiconductor and systems industries. Our Software Integrity products and services form a platform that helps our customers build security into the software development lifecycle and across the entire cyber supply chain.

We have consistently grown our revenue since 2005, despite periods of global economic uncertainty. We achieved these results because of our solid execution, leading technologies and strong customer relationships, and because we generally recognize our revenue for software licenses over the arrangement period, which typically approximates three years. See Note 2 of the Notes to Consolidated Financial Statements for a discussion on our revenue recognition policy. The revenue we recognize in a particular period generally results from selling efforts in prior periods rather than the current period. As a result, decreases as well as increases in customer spending do not immediately affect our revenues in a significant way.

Our growth strategy is based on maintaining and building on our leadership in our EDA products, expanding and proliferating our IP offerings, driving growth in the software security and quality market, and continuing to expand our product portfolio and our total addressable market. Our revenue growth from period to period is expected to vary based on the mix of our time based and upfront products. Based on our leading technologies, customer relationships, business model, diligent expense management, and acquisition strategy, we believe that we will continue to execute our strategies successfully.

Recent Developments

Developments in Export Control Regulations

On October 7, 2022, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce published changes to U.S. export control regulations (U.S. Export Regulations), including new restrictions on Chinese entities' ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. Further, on October 14, 2022, a new rule went into effect imposing U.S. export controls on additional technologies, including electronic computer-aided design software specially designed for the development of ICs with Gate-All-Around Field-Effect Transistor structures. Based on our current understanding, we believe these regulations will not have a material impact on our business. We anticipate additional changes to U.S. Export Regulations in the future, but we cannot forecast the scope or timing of such changes. We will continue to monitor such developments, including potential additional trade restrictions, and other regulatory or policy changes by the U.S. and foreign governments.

For more on risks related to government export and import restrictions such as the U.S. government's Entity List and other U.S. Export Regulations, see Part I, Item 1A, Risk Factors, "Industry Risks - We are subject to governmental export and import requirements that could subject us to liability and restrict our ability to sell our products and services, which could impair our ability to compete in international markets."

Impact of the Current Macroeconomic Environment and COVID-19

Uncertainty in the macroeconomic environment, including due to the effects of the recent rise in global inflation and interest rates, supply chain disruptions, geopolitical pressures, including the unknown impact of current and future U.S. and Chinese trade regulations, changes in China-Taiwan relations and the war in Ukraine, fluctuation in foreign exchange rates, and associated global economic conditions have resulted in volatility in credit, equity and foreign currency markets.

These uncertain macroeconomic conditions could lead some of our customers to postpone their decision-making, decrease their spending and/or delay their payments to us. For example, in the fourth quarter of fiscal 2022, we experienced a minor impact from the current macroeconomic environment in our Software Integrity segment as customers applied elevated levels of scrutiny to purchasing decisions, which has, in some cases, caused some customers to elect shorter term contracts due to their own budget uncertainty. If these uncertain macroeconomic conditions persist, they may continue to have an adverse impact on certain aspects of our business.

Additionally, the ongoing COVID-19 pandemic has impacted worldwide economic activity and financial markets and significantly increased economic volatility and uncertainty. Despite this widespread volatility and uncertainty, the COVID-19 pandemic has caused only minor disruptions to our business operations with a limited impact on our operating results thus far. The extent to which the COVID-19 pandemic impacts our business operations in future periods will depend on multiple uncertain factors, including the duration of the pandemic and its overall negative impact on the global economy generally and the semiconductor and electronics industries specifically. We have not identified trends that we expect will materially impact our future operating results at this time and continue to consider the impacts of the COVID-19 pandemic on our business operations.

While our time-based business model provides stability to our business, operating results and overall financial position, the broader implications of these macroeconomic events, particularly in the long term, remain uncertain. Further, the negative impact of these events or disruptions may be deferred due to our business model.

See Part I, Item 1A, Risk Factors for further discussion of the impact of global economic uncertainty and ongoing COVID-19 pandemic on our business, operations and financial condition.

Business Segments

Semiconductor & System Design. This segment includes our advanced silicon design, verification products and services, and semiconductor IP portfolio, which encompasses products and services that serve companies primarily in the semiconductor and electronics industries. EDA includes digital, custom and field programmable gate array (FPGA) IC design software, verification products, and manufacturing software products. Designers use these products to automate the highly complex IC design process and to reduce defects that could lead to expensive design or manufacturing re-spins or suboptimal end products. For IP, we are a leading provider of high-quality, silicon-proven IP solutions for system-on-chips (SoCs). This includes IP that has been optimized to address specific application requirements for the mobile, automotive, digital home, IoT, and cloud computing markets, enabling designers to quickly develop SoCs in these areas.

Software Integrity. This segment includes a broad portfolio of products and services to intelligently address software risks across the customer's portfolio and at all stages of the application lifecycle. The testing tools, services, and programs enable our customers to manage open source license compliance and detect, prioritize, and remediate security vulnerabilities and defects across their entire software development lifecycle. Our offerings include security and quality testing products, managed services, programs and professional services, and training.

Fiscal Year End

Our fiscal year ends on the Saturday nearest to October 31 and consists of 52 weeks, with the exception that approximately every five years, we have a 53-week year. When a 53-week year occurs, we include the additional week in the first quarter to realign fiscal quarters with calendar quarters. Fiscal 2022, 2021 and 2020 were 52-week years ending on October 29, 2022, October 30, 2021, and October 31, 2020, respectively. Fiscal 2023 will be a 52-week year.

For presentation purposes, this Form 10-K refers to the closest calendar month end.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing these financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses, and net income. On an ongoing basis, we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates. See Note 2 of the Notes to Consolidated Financial Statements for further information on our significant accounting policies.

The accounting policies that most frequently require us to make assumptions, judgments and estimates, and therefore are critical to understanding our results of operations, are:

•Revenue recognition; and

•Business combinations.

Revenue Recognition

Our contracts with customers often include promises to transfer multiple products and services to a customer. Arrangements with customers can involve multiple products and various license rights. Customers can negotiate for a broad portfolio of solutions, and favorable terms along with future purchase options to manage their overall costs. Analysis of the terms and conditions in these contracts and their effect on revenue recognition may require significant judgment.

We have concluded that our EDA software licenses in Technology Subscription License (TSL) contracts are not distinct from our obligation to provide unspecified software updates to the licensed software throughout the license term, because those promises represent inputs to a single, combined performance obligation. Where unspecified additional software product rights are part of the contract with the customer, those rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support, because such rights are provided during the same period of time and have the same time-based pattern of transfer to the customer.

For our IP licensing arrangements, we have concluded that the licenses and support services are distinct from each other, and therefore treated as separate performance obligations. Revenues from IP licenses are recognized at a point in time upon transfer of control of the IP license, and support services are recognized over the support period as a stand ready obligation to the customer.

We are required to estimate total consideration expected to be received from contracts with customers. In some circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on our expectations of the term of the contract. Generally, we have not experienced significant returns or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on our results of operations during the periods involved.

Business Combinations

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date with the exception of contract assets and contract liabilities (deferred revenue) which are recognized and measured on the acquisition date in accordance with our "Revenue Recognition" policy in Note 2. Summary of Significant Accounting Policies, as if we had originated the contracts. The excess of the fair value of the purchase price over the fair values of these net tangible and intangible assets acquired is recorded as goodwill.

Accounting for business combinations requires management to make significant estimates and assumptions including our estimates for intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include, but are not limited to:

•future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;

•historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;

•estimated obsolescence rates used in valuing technology related intangible assets;

•the expected use of the acquired assets; and

•discount rates used to discount expected future cash flows to present value, which are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks.

The fair value of the definite-lived intangibles was determined using variations of the income approach.

For acquired existing technology, the fair value was determined by applying the multi-period excess earnings method under the income approach, which involves isolating the net earnings attributable to the asset being measured based on present value of the incremental after-tax cash flows (excess earnings) attributable solely to the asset over its remaining useful life. The economic useful life was determined based on historical technology obsolescence patterns and prospective technology developments. For acquisitions completed in fiscal 2022, we assumed technological obsolescence ranging from 6 to 10 years. The present value of operating cash flows from the existing technology was determined using discount rates ranging from approximately 10% to 30%.

Customer relationships represent the fair value of the existing relationships with the acquired company's customers. Their fair value was determined using the distributor method of the income approach, a variation of the multi-period excess earnings method. The distributor method relies upon market-based distributor data to estimate the excess profits associated with the asset over its remaining useful life. The economic useful life was determined based on historical customer turnover rates. Projected income from existing customer relationships considered customer retention rates ranging from 92.5% to 97.5%. The present value of operating cash flows from existing customers was determined using discount rates ranging from approximately 10% to 15%.

We believe that our estimates and assumptions related to the fair value of acquired intangible assets are reasonable, but significant judgment is involved.

Results of Operations

The discussion of our consolidated results of operations includes year-over-year comparisons of fiscal 2022 changes compared to fiscal 2021. For a discussion of the fiscal 2021 changes compared to fiscal 2020, see the discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, filed on December 13, 2021.

Fiscal 2022 Financial Performance Summary

Results of operations for fiscal 2022, compared to fiscal 2021, reflected the following:

•Revenues were $5.1 billion, an increase of $877.3 million or 21%, due to higher revenue resulting from growth across all products and geographies.

•Total cost of revenue and operating expenses were $3.9 billion, an increase of $450.1 million or 13%, primarily due to increases of $379.2 million in employee-related costs resulting from headcount increases through organic growth and acquisitions.

•Operating income was $1.2 billion, an increase of $427.2 million or 58%, as revenue growth exceeded the growth in costs and expenses.

Revenue

Our revenues are generated from two business segments: the Semiconductor & System Design segment and the Software Integrity segment. See Note 17 of the Notes to Consolidated Financial Statements for additional information about our reportable segments and revenue by geographic regions.

Further disaggregation of the revenues into various products and services within these two segments is summarized as follows:

Semiconductor & System Design Segment

This segment is comprised of the following:

•EDA software includes digital, custom and FPGA IC design software, verification products and obligations to provide unspecified updates and support services. EDA products and services are typically sold through Technology Subscription License (TSL) arrangements that grant customers the right to access and use all of the licensed products at the outset of an arrangement; software updates are generally made available throughout the entire term of the arrangement. The duration of our TSL contracts is generally 3 years, though it may vary for specific arrangements. We have concluded that the software licenses in TSL contracts are not distinct from the obligation to provide unspecified software updates to the licensed software throughout the license term, because the multiple software licenses and support represent inputs to a single, combined offering, and timely, relevant software

updates are integral to maintaining the utility of the software licenses. We recognize revenue for the combined performance obligation under TSL contracts ratably over the term of the license.

•IP & System Integration includes our DesignWare® IP portfolio and system-level products and services. These arrangements generally have two performance obligations which consist of transferring of the licensed IP and providing related support, which includes rights to technical support and software updates that are provided over the support term and are transferred to the customer over time. Revenue allocated to the IP licenses is recognized at a point in time upon the later of the delivery date or the beginning of the license period, and revenue allocated to support is recognized over the support term. Royalties are recognized as revenue in the quarter in which the applicable customer sells its products that incorporate our IP. Payments for IP contracts are generally received upon delivery of the IP. Revenue related to the customization of certain IP is recognized as "Professional Services."

•In the case of arrangements involving the sale of hardware products, we generally have two performance obligations. The first performance obligation is to transfer the hardware product, which includes software integral to the functionality of the hardware product. The second performance obligation is to provide maintenance on the hardware and its embedded software, which includes rights to technical support, hardware repairs and software updates that are all provided over the same term and have the same time-based pattern of transfer to the customer. The portion of the transaction price allocated to the hardware product is generally recognized as revenue at the time of shipment because the customer obtains control of the product at that point in time. We have concluded that control generally transfers at that point in time because the customer has the ability to direct the use of the asset and an obligation to pay for the hardware. The portion of the transaction price allocated to the maintenance obligation is recognized as revenue ratably over the maintenance term.

•Revenue from Professional Service contracts is recognized over time, generally using costs incurred or hours expended to measure progress. We have a history of reasonably estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.

Software Integrity Segment

•We sell Software Integrity products in arrangements that provide customers the right to software licenses, maintenance updates and technical support. Over the term of these arrangements, the customer expects us to provide integral maintenance updates to the software licenses, which help customers protect their own software from new critical quality defects and potential security vulnerabilities. The licenses and maintenance updates serve together to fulfill our commitment to the customer as both work together to provide functionality to the customer and represent a combined performance obligation. We recognize revenue for the combined performance obligation over the term of the arrangement.

Our customer arrangements can involve multiple products and various license rights, and our customers negotiate with us over many aspects of these arrangements. For example, they generally request a broader portfolio of solutions, support and services and seek more favorable terms such as expanded license usage, future purchase rights and other unique rights at an overall lower total cost. No single factor typically drives our customers' buying decisions, and we compete on all fronts to serve customers in highly competitive markets. Customers generally negotiate the total value of the arrangement rather than just unit pricing or volumes.

Total Revenue

Year Ended October 31,$ Change % Change

202220212021 to 2022

(dollars in millions)

Semiconductor & System Design Segment$4,615.7 $3,810.4 $805.3 21 %

Software Integrity Segment465.8 393.8 72.0 18 %

Total$5,081.5 $4,204.2 $877.3 21 %

Our revenues are subject to fluctuations, primarily due to customer requirements including the timing and value of contract renewals. For example, we experience fluctuations in our revenues due to factors such as the timing of IP product sales, consulting projects, Flexible Spending Account (FSA) drawdowns, royalties, and hardware sales. As

revenues from IP products sales and hardware sales are recognized upfront, customer demand and timing requirements for such IP products and hardware could result in increased variability of our total revenues.

Contracted but unsatisfied or partially unsatisfied performance obligations as of October 31, 2022 were $7.1 billion. The amount and composition of unsatisfied performance obligations will fluctuate period to period. We do not believe the amount of unsatisfied performance obligations is indicative of future sales or revenue, or that such obligations at the end of any given period correlates with actual sales performance of a particular geography or particular products and services. For more information regarding our revenue as of October 31, 2022, including our contract balances as of such date, see Note 3 of the Notes to Consolidated Financial Statements.

For fiscal 2022 compared to fiscal 2021, revenues increased due to the continued organic growth of our business in all product groups and geographies.

For a discussion of revenue by geographic areas, see Note 17 of the Notes to Consolidated Financial Statements.

Time-Based Products Revenue

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

Time-based products revenue$2,993.8 $2,633.8 $360.0 14 %

Percentage of total revenue59 %63 %

The increase in time-based products revenue for fiscal 2022 compared to fiscal 2021 was primarily attributable to an increase in TSL license revenue and higher renewals from arrangements booked in prior periods.

Upfront Products Revenue

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

Upfront products revenue$1,226.7 $861.1 $365.6 42 %

Percentage of total revenue24 %20 %

Changes in upfront products revenue are generally attributable to normal fluctuations in the extent and timing of customer requirements, which can drive the amount of upfront orders and revenue in any particular period.

The increase in upfront products revenue for fiscal 2022 compared to fiscal 2021 was primarily due to an increase in the sale of IP products and hardware products driven by higher demand from customers.

Upfront products revenue as a percentage of total revenue will likely fluctuate based on the timing of IP products and hardware sales. Such fluctuations will continue to be impacted by the timing of shipments or FSA drawdowns due to customer requirements.

Maintenance and Service Revenue

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

Maintenance revenue$293.3 $235.9 $57.4 24 %

Professional service and other revenue567.7 473.5 94.2 20 %

Total$861.0 $709.4 $151.6 21 %

Percentage of total revenue17 %17 %

The increase in maintenance revenue for fiscal 2022 compared to fiscal 2021 was primarily due to an increase in the volume of hardware and IP arrangements that include maintenance.

The increase in professional services and other revenue for fiscal 2022 compared to fiscal 2021 was primarily due to an increase in the volume of IP consulting projects.

Cost of Revenue

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

Cost of products revenue$653.8 $542.1 $111.7 21 %

Cost of maintenance and service revenue343.0 271.2 71.8 26 %

Amortization of intangible assets66.9 48.5 18.4 38 %

Total$1,063.7 $861.8 $201.9 23 %

Percentage of total revenue21 %20 %

We divide cost of revenue into three categories: cost of products revenue, cost of maintenance and service revenue, and amortization of intangible assets.

Cost of products revenue. Cost of products revenue includes costs related to products sold and software licensed, hardware-related costs, allocated operating costs related to product support and distribution, royalties paid to third-party vendors, and the amortization of capitalized software development costs.

Cost of maintenance and service revenue. Cost of maintenance and service revenue includes costs to deliver our maintenance and consulting services, such as hotline and on-site support, production services and documentation of maintenance updates.

Amortization of intangible assets. Amortization of intangible assets, included in cost of revenue, includes the amortization of core/developed technology and certain contract rights intangible assets.

The increase in cost of revenue for fiscal 2022 compared to fiscal 2021 was primarily due to $102.7 million in employee-related costs as a result of headcount increases from organic growth and acquisitions, $51.7 million in hardware-related costs, $18.4 million in amortization of technology-related intangible assets, $16.4 million in costs to fulfill IP consulting arrangements, and $12.7 million in facility costs. These increases were partially offset by a decrease of $11.5 million in the fair value of our executive deferred compensation plan assets.

Operating Expenses

Research and Development

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

$1,680.4 $1,504.8 $175.6 12 %

Percentage of total revenue33 %36 %

The increase in research and development expenses for fiscal 2022 compared to fiscal 2021 was primarily due to higher employee-related costs of $199.1 million as a result of headcount increases as we continue to expand and enhance our product portfolio, increases of $19.2 million in facility costs, and $15.5 million in consultant and contractor costs. These increases were partially offset by a decrease of $86.5 million in the fair value of our executive deferred compensation plan assets.

Sales and Marketing

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

$779.8 $712.5 $67.3 9 %

Percentage of total revenue15 %17 %

The increase in sales and marketing expenses for fiscal 2022 compared to fiscal 2021 was primarily due to increases of $64.1 million in employee-related costs due to headcount increases and higher sales commissions, $12.0 million in travel and marketing costs due to an increased number of in-person meetings and events, and $3.0 million in facility costs. These increases were partially offset by a decrease of $25.5 million in the fair value of our executive deferred compensation plan assets.

General and Administrative

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

$353.8 $323.0 $30.8 10 %

Percentage of total revenue7 %8 %

The increase in general and administrative expenses for fiscal 2022 compared to fiscal 2021 was primarily due to increases of $30.8 million in legal, consulting and other professional fees, $18.6 million in maintenance and depreciation expenses, and $13.3 million in personnel-related costs due to headcount increases from hiring. These increases were partially offset by a decrease of $16.9 million in the fair value of our executive deferred compensation plan assets and bad debt recoveries of $15.9 million.

Change in Fair Value of Deferred Compensation

The income or loss arising from the change in fair value of our non-qualified deferred compensation plan obligation is recorded in cost of sales and each functional operating expense, with the offsetting change in the fair value of the related assets recorded in other income (expense), net. These assets are classified as trading securities. There is no impact on our net income from the fair value changes in our deferred compensation plan obligation and related assets.

Amortization of Intangible Assets

Amortization of intangible assets included within operating expenses consists of the amortization of trademarks, trade names, and customer relationships related to acquisitions.

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

29.8 33.9 (4.1)(12)%

Percentage of total revenue1 %1 %

The decrease in amortization of intangible assets for fiscal 2022 compared to fiscal 2021 was primarily due to certain intangible assets becoming fully amortized in fiscal 2022, partially offset by amortization expense related to intangible assets acquired during fiscal 2022.

Restructuring Charges

In the third quarter of fiscal 2021, our management approved, committed and initiated a restructuring plan (the 2021 Plan) as part of a business reorganization. Total charges under the 2021 Plan consisting primarily of severance, retirement benefits, and lease abandonment costs, were $45.5 million, of which $33.4 million was incurred in fiscal 2021 and $12.1 million was incurred in fiscal 2022. The 2021 Plan was substantially completed in the first quarter of fiscal 2022.

The following is a summary of our restructuring liabilities:

Fiscal YearBalance at Beginning of PeriodCosts IncurredCash PaymentsBalance at End of Period

(dollars in millions)

2022$14.2 $12.1 $(26.3)$-

2021$1.3 $33.4 $(20.5)$14.2

2020$22.6 $36.1 $(57.4)$1.3

See Note 18 of the Notes to Consolidated Financial Statements for additional information.

Other Income (Expense), Net

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

Interest income$8.5 $2.4 $6.1 254 %

Interest expense(1.7)(3.4)1.7 (50)%

Gains (losses) on assets related to executive deferred compensation plan(68.8)71.6 (140.4)(196)%

Foreign currency exchange gains (losses)4.7 5.3 (0.6)(11)%

Other, net10.8 (5.2)16.0 (308)%

Total$(46.5)$70.7 $(117.2)(166)%

The decrease in other income (expense) for fiscal 2022 as compared to fiscal 2021 was primarily due to the decrease in the fair value of our executive deferred compensation plan assets.

Segment Operating Results

We do not allocate certain operating expenses managed at a consolidated level to our reportable segments. These unallocated expenses consist primarily of stock-based compensation expense, amortization of intangible assets, changes in the fair value of deferred compensation plan, restructuring, litigation and acquisition-related costs. See Note 17 of the Notes to Consolidated Financial Statements for more information.

Semiconductor & System Design Segment

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

Adjusted operating income$1,628.1 $1,243.1 $385.0 31 %

Adjusted operating margin35 %33 %2 %6 %

The increase in adjusted operating income for fiscal 2022 compared to fiscal 2021 was primarily due to an increase in revenue from arrangements booked in prior periods.

Software Integrity Segment

Year Ended October 31,$ Change% Change

202220212021 to 2022

(dollars in millions)

Adjusted operating income $47.0 $38.3 $8.7 23 %

Adjusted operating margin10 %10 %- %- %

The increase in adjusted operating income for fiscal 2022 compared to fiscal 2021 was primarily due to an increase in revenue from arrangements booked in prior periods.

Income Taxes

Our effective tax rate for fiscal 2022 is 12.3%, which included a tax benefit of $61.5 million of U.S. federal research tax credit, a foreign derived intangible income (FDII) deduction of $38.9 million, and excess tax benefits from stock-based compensation of $88.8 million.

Our effective tax rate for fiscal 2021 was 6.1%, which included a tax benefit of $45.5 million of U.S. federal research tax credit, a FDII deduction of $31.2 million, and excess tax benefits from stock-based compensation of $94.0 million.

The Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017 that were not subject to the one-time transition tax. We have provided for foreign withholding taxes on undistributed earnings of certain of our foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries.

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 2019, as required under Hungarian law, Synopsys Hungary paid the assessment and 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 and September 22, 2022. In response to a request by the Administrative Court we filed an additional brief on November 23, 2022. We expect a hearing to be scheduled in early 2023.

See Note 15 of the Notes to Consolidated Financial Statements for further discussion of the provision for income taxes, the impacts related to the Tax Act, and the Hungarian audit.

Liquidity and Capital Resources

Our principal sources of liquidity are funds generated from our business operations and funds that may be drawn down under our revolving credit and term loan facilities.

As of October 31, 2022, we held $1.6 billion in cash, cash equivalents and short-term investments. We also held $2.3 million in restricted cash primarily associated with deposits for office leases. Our cash equivalents consisted primarily of taxable money market mutual funds, time deposits and highly liquid investments with maturities of three months or less. Our short-term investments include U.S. government and municipal obligations, investment-grade available-for-sale debt and asset backed securities. We believe that the overall credit quality of our portfolio is strong, with our global excess cash, and our cash equivalents, invested in banks and securities with a weighted-average credit rating exceeding AA.

As of October 31, 2022, approximately $755.1 million of our cash and cash equivalents were domiciled in various foreign jurisdictions. We have provided for foreign withholding taxes on the undistributed earnings of certain of our foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries.

We believe that our existing cash, cash equivalents and short-term investments and sources of liquidity will be sufficient to satisfy our cash requirements and capital return program over at least the next 12 months. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. Our future cash requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, and the timing and extent of our spending to support our research and development efforts. We also may invest in or acquire businesses, applications or technologies, or may further expand our board-authorized stock repurchase program, which may require the use of significant cash resources and/or additional financing.

Cash Flows

Year Ended October 31,$ Change

202220212021 to 2022

(dollars in millions)

Cash provided by operating activities$1,738.9 $1,492.6 $246.3

Cash used in investing activities$(572.6)$(549.0)$(23.6)

Cash used in financing activities$(1,116.3)$(748.7)$(367.6)

Cash Provided by Operating Activities

We expect cash from our operating activities to fluctuate as a result of a number of factors, including the timing of our billings and collections, our operating results, and the timing and amount of tax and other liability payments. Cash provided by our operations is dependent primarily upon the payment terms of our license agreements. We generally receive cash from upfront arrangements much sooner than from time-based products revenue, in which the license fee is typically paid either quarterly or annually over the term of the license.

The increase in cash provided by operating activities was primarily attributable to higher net income and higher accounts receivable collection, partially offset by timing of customer billings and higher disbursements for operations, including vendor and tax payments.

Cash Used in Investing Activities

The increase in cash used in investing activities was primarily due to higher cash paid for acquisitions of $126.4 million and higher purchases of property and equipment of $42.8 million, partially offset by higher proceeds from the sales and maturities of short-term investments of $80.8 million and lower purchases of short-term investments of $64.5 million.

Cash Used in Financing Activities

The increase in cash used in financing activities was primarily due to higher stock repurchases of $311.9 million, higher debt repayments of $48.8 million and higher taxes paid for net share settlements of $35.1 million, partially offset by higher proceeds from issuance of common stock of $27.2 million.

Credit and Term Loan Facilities

On January 22, 2021, we entered into a Fourth Extension and Amendment Agreement (the Fourth Amendment), which amended and restated our previous credit agreement, dated as of November 28, 2016 (as amended and restated, the Credit Agreement). Our outstanding borrowings under the previous credit agreement, which as of January 22, 2021 consisted of term loans in the aggregate principal amount of $97.5 million, were carried over under the Credit Agreement and fully paid on November 26, 2021.

The Fourth Amendment extended the termination date of the existing $650.0 million senior unsecured revolving credit facility (the Revolver) from November 28, 2021 to January 22, 2024, which could be further extended at our option. The Credit Agreement also provides an uncommitted incremental loan facility of up to $150.0 million in the aggregate principal amount. The Credit Agreement contains financial covenants requiring us to maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, as well as other non-financial covenants. As of October 31, 2022, we were in compliance with all financial covenants.

There was no outstanding balance under the Revolver as of October 31, 2022 and October 31, 2021. We expect our borrowings, if any, under the Revolver will fluctuate from quarter to quarter.

Borrowings bear interest at a floating rate based on a margin over our choice of market observable base rates as defined in the Credit Agreement. As of October 31, 2022, the Revolver bore interest at LIBOR +1%. In addition, commitment fees are payable on the Revolver at rates between 0.125% and 0.200% per year based on our leverage ratio on the daily amount of the revolving commitment.

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 October 31, 2022, we had a $20.8 million outstanding balance under the agreement.

Stock Repurchase Program

Our Board of Directors (the Board) previously approved a stock repurchase program (the Program) with authorization to purchase up to $1.0 billion of our common stock in December 2021. The Board approved a replenishment of the Program up to $1.5 billion in September 2022.

During the fiscal year 2022, we repurchased 3.6 million shares of common stock at an average price of $314.51 per share for an aggregate purchase price of $1.1 billion. As of October 31, 2022, $1.4 billion remained available for future stock repurchases. The pace of our repurchase activity will depend on factors such as our working capital needs, our cash requirements for acquisitions, our debt repayment obligations, our stock price, and economic and market conditions.

The IR Act was enacted in the United States on August 16, 2022. The IR Act imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The total taxable value of shares repurchased is reduced by the fair market value of any newly issued shares during the taxable year. We are assessing the potential impact of the stock repurchase excise tax. Based on our preliminary assessment, we do not expect a material impact on our overall capital allocation strategy or our consolidated financial statements. Risks related to the IR Act are described in Part I, Item 1A, Risk Factors.

Contractual and Other Obligations

Our material cash requirements include the following contractual and other obligations.

Leases

We have operating lease arrangements for office space, data center, equipment and other corporate assets. As of October 31, 2022, we had lease payment obligations, net of immaterial sublease income, of $569.3 million, with $54.5 million payable within 12 months.

Purchase Obligations

Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services. As of October 31, 2022, we had $661.1 million of purchase obligations, with $367.4 million payable within 12 months. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

Term Loan

Refer to "Credit and Term Loan Facilities" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K for more information.

Long Term Accrued Income Taxes

As of October 31, 2022, we had $18.8 million of long-term accrued income taxes which represent uncertain tax benefits. Currently, a reasonably reliable estimate of timing of payments related to uncertain tax benefits in individual years beyond fiscal 2022 cannot be made due to uncertainties in timing of the commencement and settlement of potential tax audits.