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SYNOPSYS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/18/2017 | 10:38pm CEST
This Quarterly Report on Form 10-Q, includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act) and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), which are subject to the "safe harbor" created by
those sections. Any statements herein that are not statements of historical fact
may be deemed to be forward-looking statements. For example, words such as
"may," "will," "could," "would," "can," "should," "anticipate," "expect,"
"intend," "believe," "estimate," "project," "continue," "forecast," or the
negatives of such terms, and similar expressions intended to identify
forward-looking statements. Without limiting the foregoing, forward-looking
statements contained in this Quarterly Report on Form 10-Q include, but are not
limited to, statements concerning expected growth in the semiconductor industry
and the effects of industry and customer consolidation, our business outlook,
our business model, our growth strategy, the ability of our prior acquisitions
to drive revenue growth, the sufficiency of our cash, cash equivalents and
short-term investments and cash generated from operations, our future liquidity
requirements, and other statements that involve certain known and unknown risks,
uncertainties and other factors that could cause our actual results, time frames
or achievements to differ materially from those expressed or implied in our
forward-looking statements. Such risks and uncertainties include, among others,
those identified below in Part II, Item 1A. Risk Factors of this Quarterly
Report on Form 10-Q. The information included herein represents our estimates
and assumptions as of the date of this filing. Unless required by law, we
undertake no obligation to update publicly any forward-looking statements, or to
update the reasons actual results could differ materially from those anticipated
in these forward-looking statements, even if new information becomes available
in the future. All subsequent written or oral forward-looking statements
attributable to Synopsys or persons acting on our behalf are expressly qualified
in their entirety by these cautionary statements. Readers are urged to carefully
review and consider the various disclosures made in this report and in other
documents we file from time to time with the Securities and Exchange Commission
(SEC) that attempt to advise interested parties of the risks and factors that
may affect our business.
The following summary of our financial condition and results of operations
should be read together with our unaudited condensed consolidated financial
statements and the related notes thereto contained in Part I, Item 1 of this
report and with our audited consolidated financial statements and the related
notes thereto contained in our Annual Report on Form 10-K for the fiscal year
ended October 31, 2016, as filed with the SEC on December 12, 2016.
Overview
Business Summary
Synopsys, Inc. provides software, intellectual property, and services used by
designers across the entire silicon to software spectrum, from engineers
creating advanced semiconductors to software developers seeking to ensure the
quality and security of their applications. We are a global leader in supplying
the electronic design automation (EDA) software that engineers use to design and
test ICs, also known as chips. We also offer intellectual property (IP)
products, which are pre-designed circuits that engineers use as components of
larger chip designs rather than design those circuits themselves. We provide
software and hardware used to develop the electronic systems that incorporate
chips and the software that runs on them. To complement these offerings, we
provide technical services and support to help our customers develop advanced
chips and electronic systems. We are also a leading provider of software tools
and services that improve the quality and security of software code in a wide
variety of industries, including electronics, financial services, energy,
industrials, and automotive.
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, their research and development
budget and spending decisions may be affected by their business outlook and
willingness to invest in new and increasingly complex chip designs. In addition,
several consolidations have taken place in the semiconductor industry recently.
While we do not believe customer consolidations have had a material impact on
our results, the future impact is uncertain. For a discussion of potential
risks, please see the risk factor titled "Consolidation among our customers and
within the industries in which we operate, as well as our dependence on a
relatively small number of large customers, may negatively impact our operating
results." in Part II, Item 1A, Risk Factors.

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Despite global economic uncertainty, we have maintained profitability and
positive cash flow on an annual basis in recent years. We achieved these results
not only because of our solid execution, leading technologies and strong
customer relationships, but also because of our time-based revenue business
model. Under this model, a substantial majority of our customers pay over time
and we typically recognize this revenue over the life of the contract, which
averages approximately three years. Time-based revenue consists of time-based
products, maintenance and service revenue. The revenue we recognize in a
particular period generally results from selling efforts in prior periods rather
than the current period. Due to our business model, decreases as well as
increases in customer spending do not immediately affect our revenues in a
significant way.
Our growth strategy is based on building on our leadership in our EDA products,
expanding and proliferating our IP offerings, and driving growth in the software
quality and security market. As we continue to expand our product portfolio and
our total addressable market, for instance in the software quality and security
space, and as hardware product sales grow, we may experience increased
variability in our total revenue, though we expect time-based revenue to
continue to represent at least 90% of all revenue other than hardware revenue.
Overall, our business outlook remains solid based on our leading technologies,
customer relationships, business model, diligent expense management, and
acquisition strategy. We believe that these factors will help us continue to
execute our strategies successfully.
Financial Performance Summary
In the third quarter of fiscal 2017, compared to the same period of fiscal 2016:
•         Revenues were $695.4 million, an increase of $80.2 million, or 13%,
          primarily driven by the overall growth in our business such as
          increases of hardware sales, IP consulting projects and TSL license
          revenues, and to a lesser extent from acquisitions.


•         Total cost of revenue and operating expenses were $590.0 million, an
          increase of $51.5 million, or 10%, primarily due to increases in
          headcount, including those from acquisitions, and higher product and
          consulting costs due to higher sales.

• Operating income of $105.4 million, an increase of $28.6 million or 37%.



During the three-month period ended July 31, 2017, 86% of our revenue was
time-based.
New Accounting Pronouncements
See Note 17 of the Notes to Unaudited Condensed Consolidated Financial
Statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial results under the heading "Results
of Operations" below are based on our unaudited condensed consolidated financial
statements, which we have prepared in accordance with U.S. GAAP. In preparing
these financial statements, we make assumptions, judgments and estimates that
can affect the reported amounts of assets, liabilities, revenues and expenses
and net income. On an ongoing basis, we evaluate our estimates based on
historical experience and various other assumptions we believe are reasonable
under the circumstances. Our actual results may differ from these estimates.
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;


• Valuation of business combinations;

• Valuation of intangible assets; and

• Income taxes.

Our critical accounting policies and estimates are discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, filed with the SEC on December 12, 2016.


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Results of Operations
Revenue Background
We generate our revenue from the sale of products that include software
licenses, maintenance and services, and to a lesser extent, hardware products.
Software license revenue consists of fees associated with the licensing of our
software. Maintenance and service revenue consists of maintenance fees
associated with perpetual licenses and professional services fees. Hardware
revenue consists of sales of Field Programmable Gate Array (FPGA)-based
emulation and prototyping products.
Most of our customer arrangements are complex, involving hundreds of products
and various license rights, bundled with post-contract customer support and
additional meaningful rights that provide a complete end-to-end solution to the
customer. Throughout the contract, our customers are typically using a myriad of
products to complete each phase of a chip design and are concurrently working on
multiple chip designs, or projects, in different phases of the design. During
this time, the customer looks to us to release state-of-the-art technology as we
keep up with the pace of change, to address requested enhancements to our tools
to meet customer specifications, to provide support at each stage of the
customer's design, including the final manufacturing of the chip (the tape-out
stage), and other important services.
With respect to software licenses, we utilize primarily two license types:
•         Technology Subscription Licenses (TSLs). TSLs are time-based licenses
          for a finite term, and generally provide the customer limited rights to
          receive, or to exchange certain quantities of licensed software for,
          unspecified future technology. The majority of our arrangements are
          TSLs due to the nature of the business and customer requirements. In
          addition to the licenses, the arrangements also include: post-contract
          customer support, which includes providing frequent updates and
          upgrades to maintain the utility of the software due to rapid changes
          in technology; other intertwined services such as multiple copies of
          the tools; assisting our customers in applying our technology in their
          development environment; and rights to remix licenses for other
          licenses.


•         Perpetual licenses. Perpetual licenses continue as long as the customer
          renews maintenance plus an additional 20 years. Perpetual licenses do
          not provide the customer any rights to receive, or to exchange licensed
          software for, unspecified future technology. Customers purchase
          maintenance separately for the first year and may renew annually.


For the two software license types, we recognize revenue as follows:
•         TSLs. We typically recognize revenue from TSL fees ratably over the
          term of the license period, or as customer installments become due and
          payable, whichever is later. Revenue attributable to TSLs is reported
          as "time-based products revenue" in the unaudited condensed
          consolidated statements of operations.


•         Perpetual licenses. We recognize revenue from perpetual licenses in
          full upon shipment of the software if payment terms require the
          customer to pay at least 75% of the license fee and 100% of the
          maintenance fee within one year from shipment and all other revenue
          recognition criteria are met. Revenue attributable to these perpetual
          licenses is reported as "upfront products revenue" in the unaudited
          condensed consolidated statements of operations. For perpetual licenses
          in which less than 75% of the license fee and 100% of the maintenance
          fee is payable within one year from shipment, we recognize revenue as
          customer installments become due and payable. Such revenue is reported
          as "time-based products revenue" in the unaudited condensed
          consolidated statements of operations.


Under current accounting rules and policies, we recognize revenue from orders we
receive for software licenses, services and hardware products at varying times.
•         In most instances, we recognize revenue on a TSL software license order
          over the license term and on a term or perpetual software license order
          in the quarter in which the license is delivered. The weighted-average
          term of the TSLs and term licenses is typically three years, but varies
          from quarter to quarter due to the nature and timing of the
          arrangements entered into during the quarter. For the three months
          ended July 31, 2017 and 2016, the weighted-average license term was 2.5
          and 3.1 years, respectively.


•         Revenue on contracts requiring significant modification or development
          is accounted for using the percentage of completion method over the
          period of the development.


•         Revenue on hardware product orders is generally recognized in full at
          the time the product is shipped and when title is transferred.



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•         Contingent revenue is recognized if and when the event that removes the
          contingency occurs.


•         Revenue on maintenance orders is recognized ratably over the
          maintenance period (normally one year).


•         Revenue on professional services orders is generally recognized as the
          services are performed.


•         Infrequently, we enter into certain license arrangements wherein
          licenses are provided for a finite term without any other services or
          rights, including rights to receive, or to exchange licensed software
          for, unspecified future technology. We recognize revenue from term
          licenses in full upon shipment of the software and when all other
          revenue recognition criteria are met.


Our revenue in any period is equal to the sum of our time-based products,
upfront products, and maintenance and services for the period. We derive
time-based products revenue largely from TSL orders received and delivered in
prior quarters and to a smaller extent from contracts in which revenue is
recognized as customer installments become due and payable and from contingent
revenue arrangements. We derive upfront products revenue directly from term and
perpetual license and hardware product orders mostly booked and shipped during
the period. We derive maintenance revenue largely from maintenance orders
received in prior periods since our maintenance orders generally yield revenue
ratably over a term of one year. We also derive professional services revenue
primarily from orders received in prior quarters, since we recognize revenue
from professional services as those services are delivered and accepted or on
percentage of completion for arrangements requiring significant modification of
our software, and not when they are booked.
Our revenue is sensitive to the mix of TSLs and perpetual licenses delivered
during a reporting period. A TSL order typically yields lower current quarter
revenue but contributes to revenue in future periods. For example, a $120,000
order for a three-year TSL delivered on the last day of a quarter typically
generates no revenue in that quarter, but $10,000 in each of the 12 succeeding
quarters. Conversely, a $120,000 order for perpetual licenses with greater than
75% of the license fee due within one year from shipment typically generates
$120,000 in revenue in the quarter the product is delivered, but no future
revenue. Additionally, revenue in a particular quarter may also be impacted by
perpetual licenses in which less than 75% of the license fees and 100% of the
maintenance fees are payable within one year from shipment as the related
revenue will be recognized as revenue in the period when customer payments
become due and payable.
Most of our customer arrangements are complex, involving hundreds of products
and various license rights, and our customers bargain with us over many aspects
of these arrangements. For example, they often demand 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 a highly
competitive EDA market. Customers generally negotiate the total value of the
arrangement rather than just unit pricing or volumes.
Total Revenue
                          July 31,
                      2017         2016       $ Change      % Change
                                 (dollars in millions)
Three months ended $   695.4    $   615.2    $     80.2        13 %
Nine months ended  $ 2,028.2    $ 1,788.8    $    239.4        13 %

Our revenue is subject to fluctuations, primarily due to customer requirements, including payment terms and the timing and value of contract renewals. For example, we experience variability in our revenue due to factors such as the timing of IP consulting projects, royalties, variability in hardware sales and certain contracts where revenue is recognized when customer installment payments are due. As revenue from hardware sales are recognized upfront, customer demand and timing requirements for such hardware may result in increased variability of our total revenue. The increase in total revenue for the three and nine months ended July 31, 2017 compared to the same period in fiscal 2016 was primarily attributable to the overall growth in our business mainly due to higher hardware sales, IP consulting projects, TSL license revenue from arrangements booked in prior periods, and to a lesser extent due to revenue from acquired companies.


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Time-Based Products Revenue

                                    July 31,
                               2017          2016        $ Change     % Change
                                           (dollars in millions)

Three months ended $ 503.5 $ 479.3 $ 24.2 5 % Percentage of total revenue 73 % 78 % Nine months ended

           $ 1,494.0     $ 1,427.7     $     66.3       5 %

Percentage of total revenue 74 % 80 %

The increase in time-based products revenue for the three and nine months ended July 31, 2017 compared to the same periods in fiscal 2016 was primarily attributable to an increase in TSL license revenue due to arrangements booked in prior periods. Upfront Products Revenue

                                  July 31,
                              2017        2016       $ Change      % Change
                                         (dollars in millions)

Three months ended $ 100.3 $ 66.9 $ 33.4 50 % Percentage of total revenue 14 % 11 % Nine months ended

           $ 263.3     $ 168.5     $     94.8        56 %

Percentage of total revenue 13 % 9 %



Changes in upfront products revenue are generally attributable to normal
fluctuations in customer requirements, which can drive the amount of upfront
orders and revenue in any particular period.
The increase in upfront products revenue for the three and nine months ended
July 31, 2017 compared to the same periods in fiscal 2016 was primarily
attributable to an increase in the sale of hardware products and to a lesser
extent IP products.
As our sales of hardware products grow, upfront products revenue as a percentage
of total revenue will likely fluctuate modestly. Such fluctuations will continue
to be impacted by the timing of shipments due to customer requirements.

Maintenance and Service Revenue

                                              July 31,
                                          2017        2016       $ Change      % Change
                                                     (dollars in millions)
Three months ended
Maintenance revenue                     $  22.4     $  19.3     $      3.1        16 %
Professional services and other revenue    69.2        49.7           19.5        39 %

Total maintenance and service revenue $ 91.6 $ 69.0 $ 22.6 33 % Percentage of total revenue

                  13 %        11 %
Nine months ended
Maintenance revenue                     $  61.5     $  55.7     $      5.8        10 %
Professional services and other revenue   209.4       136.9           72.5        53 %

Total maintenance and service revenue $ 270.9 $ 192.6 $ 78.3 41 % Percentage of total revenue

                  13 %        11 %


Changes in maintenance revenue are generally attributable to timing of perpetual contracts and maintenance renewals. The increase in maintenance revenue for the three and nine months ended July 31, 2017 compared to the same periods in fiscal 2016 was primarily due to an increase in the volume of arrangements that include maintenance.


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The increase in professional services and other revenue for the three and nine
months ended July 31, 2017 compared to the same periods in fiscal 2016 was
primarily due to the increase in, and timing of, IP consulting projects that are
accounted for using the percentage of completion method and contributions from
acquisitions.
We expect our professional services revenues to increase in future periods as a
result of recent acquisitions, but we do not expect the impact to be material to
our total revenue.
Cost of Revenue
                                              July 31,
                                          2017        2016       $ Change      % Change
                                                     (dollars in millions)
Three months ended
Cost of products revenue                $ 107.1     $  92.0     $    15.1        16  %

Cost of maintenance and service revenue 43.8 23.2 20.6 89 % Amortization of intangible assets 18.6 24.5 (5.9 ) (24 )% Total

                                   $ 169.5     $ 139.7     $    29.8        21  %
Percentage of total revenue                  24 %        23 %
Nine months ended
Cost of license revenue                 $ 305.0     $ 253.9     $    51.1        20  %

Cost of maintenance and service revenue 122.6 67.4 55.2 82 % Amortization of intangible assets 59.7 79.5 (19.8 ) (25 )% Total

                                   $ 487.3     $ 400.8     $    86.5        22  %
Percentage of total revenue                  24 %        22 %


We divide cost of revenue into three categories: cost of products revenue, cost of maintenance and service revenue, and amortization of intangible assets. We segregate expenses directly associated with consulting and training services from cost of products revenue associated with internal functions providing license delivery and post-customer contract support services. We then allocate these group costs between cost of products revenue and cost of maintenance and service revenue based on products and maintenance and service revenue reported. Cost of products revenue. Cost of products revenue includes costs related to products sold and software licensed, allocated operating costs related to product support and distribution costs, royalties paid to third-party vendors, and the amortization of capitalized research and development costs associated with software products that had reached technological feasibility. Cost of maintenance and service revenue. Cost of maintenance and service revenue includes operating costs related to maintaining the infrastructure necessary to operate our services and costs to deliver our consulting services, such as hotline and on-site support, production services and documentation of maintenance updates. We expect our cost of maintenance and service revenue to increase in future periods because of recent acquisitions, but we do not expect the impact to be material to our total cost of revenue. Amortization of intangible assets. Amortization of intangible assets, which is recorded to cost of revenue and operating expenses, includes the amortization of core/developed technology, trademarks, trade names, customer relationships, covenants not to compete related to acquisitions and certain contract rights related to acquisitions. The increase in cost of revenue for the three months ended July 31, 2017 compared to the same period in fiscal 2016 was primarily due to increases of $17.0 million in personnel-related costs as a result of headcount increases, including those from acquisitions, $8.5 million in hardware product costs due to increases in, and timing of, shipments, and $7.6 million in costs related to servicing IP consulting arrangements, which were partially offset by a decrease of $5.9 million in amortization of intangible assets. The increase in cost of revenue for the nine months ended July 31, 2017 compared to the same period in fiscal 2016 was primarily due to increases of $45.2 million in personnel-related costs as a result of headcount increases, including those from acquisitions, $32.4 million in hardware product costs due to increases in, and timing of, shipments, and $20.3 million in costs related to servicing IP consulting arrangements, which were partially offset by a decrease of $19.8 million in amortization of intangible assets. Changes in other cost of revenue categories for the above-mentioned periods were not individually material.


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Operating Expenses
Research and Development
                                  July 31,
                              2017        2016       $ Change     % Change
                                         (dollars in millions)

Three months ended $ 228.7 $ 221.9 $ 6.8 3 % Percentage of total revenue 33 % 36 % Nine months ended

           $ 664.3     $ 634.8     $     29.5       5 %

Percentage of total revenue 33 % 35 %

The increase in research and development expenses for the three and nine months ended July 31, 2017 compared to the same period in fiscal 2016 was primarily due to increases in personnel-related costs as a result of headcount increases, including those from acquisitions. Changes in other research and development expense categories for the above-mentioned periods were not individually material. Sales and Marketing

                                  July 31,
                              2017        2016       $ Change     % Change
                                         (dollars in millions)

Three months ended $ 131.5 $ 127.3 $ 4.2 3 % Percentage of total revenue 19 % 21 % Nine months ended

           $ 395.2     $ 370.9     $     24.3       7 %

Percentage of total revenue 19 % 21 %



The increase in sales and marketing expenses for the three months ended July 31,
2017 compared to the same period in fiscal 2016 was primarily due to increases
of $4.3 million in personnel-related costs as a result of headcount increases.
The increase in sales and marketing expenses for the nine months ended July 31,
2017 compared to the same period in fiscal 2016 was primarily due to increases
of $15.6 million in personnel-related costs as a result of headcount increases
and $5.9 million in variable compensation, primarily based on timing of
shipments.
Changes in other sales and marketing expense categories for the above-mentioned
periods were not individually material.
General and Administrative
                                  July 31,
                              2017        2016       $ Change      % Change
                                         (dollars in millions)

Three months ended $ 46.4 $ 42.5 $ 3.9 9 % Percentage of total revenue 7 % 7 % Nine months ended

           $ 170.7     $ 123.8     $     46.9        38 %

Percentage of total revenue 8 % 7 %

The increase in general and administrative expenses for the three months ended July 31, 2017 compared to the same period in fiscal 2016 was primarily due to increases in personnel-related costs as a result of headcount increases. The increase in general and administrative expenses for the nine months ended July 31, 2017 compared to the same period in fiscal 2016 was primarily due to increases of $38.0 million for accrued loss contingencies as a result of litigation, $12.5 million in personnel-related costs as a result of headcount increases and $5.3 million in facilities expenses, partially offset by $7.6 million of lower professional service costs.


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Changes in other general and administrative expense categories for the above-mentioned periods were not individually material. Amortization of Intangible Assets

                                     July 31,
                                 2017       2016       $ Change     % Change
                                           (dollars in millions)

Three months ended Included in cost of revenue $ 18.6 $ 24.5 $ (5.9 ) (24 )% Included in operating expenses 7.9 7.1 0.8 11 % Total

                          $ 26.5     $  31.6     $   (5.1 )     (16 )%

Percentage of total revenue 4 % 5 % Nine months ended Included in cost of revenue $ 59.7 $ 79.5 $ (19.8 ) (25 )% Included in operating expenses 23.8 21.0 2.8 13 % Total

                          $ 83.5     $ 100.5     $  (17.0 )     (17 )%

Percentage of total revenue 4 % 6 %



The decrease in amortization of intangible assets for the three and nine months
ended July 31, 2017 compared to the same periods in fiscal 2016 was primarily
due to intangible assets that were fully amortized, partially offset by
additions of acquired intangible assets. See Note 4 of the Notes to Unaudited
Condensed Consolidated Financial Statements for a schedule of future
amortization amounts.
Restructuring Charges
During the three and nine months ended July 31, 2017, we incurred restructuring
charges of approximately $6.0 million and $31.0 million, respectively, for
involuntary and voluntary employee termination actions. The restructuring
actions were undertaken to structure the company for future growth, reallocate
resources to priority areas, and to a lesser extent, eliminate operational
redundancy. These charges consist primarily of severance and retirement
benefits. During the three and nine months ended July 31, 2017, the Company made
payments of $2.7 million and $21.5 million, respectively. Payments under the
2017 restructuring plans are expected to be completed by the end of the second
quarter of fiscal 2018.
During the three months ended July 31, 2016, we did not record any restructuring
charges and during the nine months ended July 31, 2016, we recorded $3.0 million
of restructuring charges. See Note 7 of the Notes to Unaudited Condensed
Consolidated Financial Statements for additional information related to our
restructuring charges.

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Other Income (Expense), net
                                              July 31,
                                         2017           2016         $ Change        % Change
                                                       (dollars in millions)
Three months ended
Interest income                      $      2.0     $      1.0     $       1.0           100  %
Interest (expense)                         (2.3 )         (1.2 )          (1.1 )          92  %
Gain (loss) on assets related to
executive deferred compensation plan        6.8            6.8               -             -  %
Foreign currency exchange gain
(loss)                                      0.3           (0.1 )           0.4          (400 )%
Other, net                                  0.6            2.0            (1.4 )         (70 )%
Total                                $      7.4     $      8.5     $      (1.1 )         (13 )%
Nine months ended
Interest income                      $      4.7     $      2.5     $       2.2            88  %
Interest (expense)                         (5.5 )         (2.7 )          (2.8 )         104  %
Gain (loss) on assets related to
executive deferred compensation plan       22.3            6.1            16.2           266  %
Foreign currency exchange gain
(loss)                                      2.9           (0.3 )           3.2        (1,067 )%
Other, net                                  2.9            6.6            (3.7 )         (56 )%
Total                                $     27.3     $     12.2     $      15.1           124  %


Other income (expense), net, for the three months ended July 31, 2017 compared
to the same period in fiscal 2016 remained relatively flat.
Other income (expense), net, for the nine months ended July 31, 2017 was higher
compared to the same period in fiscal 2016, primarily due to gains in the market
value of our executive deferred compensation plan assets compared to a loss in
the corresponding period.
Taxes
Our effective tax rate decreased in the three and nine months ended July 31,
2017, as compared to the same period in fiscal 2016, primarily due to excess tax
benefits from stock-based compensation, partially offset by the permanent
reinstatement of the U.S. federal research tax credit in the first quarter of
fiscal 2016. For further discussion of the provision for income taxes, see Note
15 of the Notes to Unaudited Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
Our sources of cash, cash equivalents and short-term investments are funds
generated from our business operations and funds that may be drawn down under
our revolving credit and term loan facilities.
As of July 31, 2017, we held an aggregate of $108.3 million in cash, cash
equivalents and short-term investments in the United States and an aggregate of
$1,194.2 million in our foreign subsidiaries. Certain amounts held outside the
U.S. could be repatriated to the U.S. (subject to local law restrictions), but
under current U.S. tax law, could be subject to U.S. income taxes less
applicable foreign tax credits. We have provided for the U.S. income tax
liability on foreign earnings, except for foreign earnings that are considered
indefinitely reinvested outside the U.S. However, in the event funds from
foreign subsidiaries were needed to fund cash needs in the U.S. and if U.S.
taxes have not already been previously accrued, we would be required to accrue
and pay additional U.S. taxes in order to repatriate these funds.
The following sections discuss changes in our unaudited condensed consolidated
balance sheets and statements of cash flows, and other commitments of our
liquidity and capital resources during the nine months ended July 31, 2017.

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Cash, Cash Equivalents and Short-Term Investments

                           July 31,     October 31,
                             2017           2016         $ Change      % Change
                                          (dollars in millions)

Cash and cash equivalents $ 1,155.0 $ 976.6 $ 178.4 18 % Short-term investments $ 147.5 $ 140.7 $ 6.8 5 % Total

                     $ 1,302.5    $     1,117.3    $    185.2        17 %


Cash, cash equivalents and short-term investments increased primarily due to cash generated from our operations, proceeds from our credit facilities and cash received from employee stock purchases and option exercises. Cash generated was partially offset by cash used for acquisitions and intangible assets, stock repurchases under our accelerated stock repurchase agreements (the December 2016 ASR, the February 2017 ASR, and the May 2017 ASR), purchases of property and equipment, repayment of debt, and payments for taxes related to net share settlement of equity awards.

Cash Flows
                                            July 31,
                                        2017        2016       $ Change
                                             (dollars in millions)

Nine months ended Cash provided by operating activities $ 449.7 $ 439.0 $ 10.7 Cash (used in) investing activities (245.0 ) (125.6 ) (119.4 ) Cash (used in) financing activities (25.9 ) (205.6 ) 179.7



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 or used in 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.
Cash provided by operating activities. Cash provided by operating activities for
the nine months ended July 31, 2017 was higher compared to the same period in
fiscal 2016, primarily due to an increase in cash collections, partially offset
by higher disbursements for operations, including vendors.
Cash (used in) investing activities. Cash used in investing activities for the
nine months ended July 31, 2017 was higher compared to the same period in fiscal
2016, primarily due to higher cash paid for acquisitions and intangible assets
of $127.6 million.
Cash (used in) financing activities. Cash provided by financing activities for
the nine months ended July 31, 2017 was higher compared to the same period in
fiscal 2016, primarily due to higher proceeds from our credit facilities, net of
repayments, of $158.8 million, and lower stock repurchase activities of $25.0
million.
Accounts Receivable, net
                          July 31,      October 31,
                            2017            2016         $ Change    % Change
                                         (dollars in millions)

Accounts Receivable, net $ 411.3 $ 438.9 $ (27.6 ) (6 )%

Our accounts receivable and days sales outstanding (DSO) are primarily driven by our billing and collections activities. Our DSO was 54 days at July 31, 2017 and 63 days at October 31, 2016. Accounts receivable and DSO decreased primarily due to the timing of billings to customers and an increase in collections.


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Working Capital Working capital is comprised of current assets less current liabilities, as shown on our unaudited condensed consolidated balance sheets:

                     July 31,     October 31,
                       2017           2016         $ Change     % Change
                                    (dollars in millions)
Current assets      $ 1,894.6    $     1,716.9    $    177.7         10 %
Current liabilities   1,764.4          1,714.9          49.5          3 %
Working capital     $   130.2    $         2.0    $    128.2      6,410 %


Increases in our working capital were primarily due to (1) an increase of $185.2
million in cash, cash equivalents and short-term investments, (2) a decrease of
$39.0 million in deferred revenue, (3) an increase of $20.5 million in prepaid
and other current assets primarily due to timing of service contract renewals,
and (4) a decrease of $6.4 million in accrued income taxes. These changes in
working capital were partially offset by an increase of $93.0 million in
short-term debt and a decrease of $27.6 million in accounts receivable, net, due
to the timing of billings to customers and collections.
Other Commitments-Credit Facility
On November 28, 2016, we entered into an amended and restated credit agreement
with several lenders (the Credit Agreement) providing for (i) a $650.0 million
senior unsecured revolving credit facility (the Revolver) and (ii) a $150.0
million senior unsecured term loan facility (the Term Loan). The Credit
Agreement amended and restated our previous credit agreement dated May 19, 2015
(the 2015 Agreement), in order to increase the size of the revolving credit
facility from $500.0 million to $650.0 million, provide a new $150.0 million
senior unsecured term loan facility, and to extend the termination date of the
revolving credit facility from May 19, 2020 to November 28, 2021. Subject to
obtaining additional commitments from lenders, the principal amount of the loans
provided under the Credit Agreement may be increased by us by up to an
additional $150.0 million. The Credit Agreement contains financial covenants
requiring the Company to operate within a maximum leverage ratio and a minimum
interest coverage ratio, as well as other non-financial covenants. As of
July 31, 2017, we were in compliance with all financial covenants.
During the first quarter of fiscal 2017, we received funding of $150.0 million
under the Term Loan. Outstanding principal payments under the Term Loan are due
as follows:
Fiscal year               (in thousands)
Remainder of fiscal 2017 $          1,875
2018                               10,313
2019                               14,062
2020                               17,813
2021                               27,187
2022                               75,000
Total                    $        146,250

As of July 31, 2017, we had a $145.8 million outstanding balance, net of debt issuance costs, under the Term Loan, of which $137.8 million is classified as long-term liabilities, and a $290.0 million outstanding balance under the Revolver, all of which are considered short-term liabilities. As of October 31, 2016, we had no outstanding balance under the previous term loan from the 2015 Agreement and a $205.0 million outstanding balance under the previous revolver from the 2015 Agreement, which are considered short-term liabilities. We expect borrowings 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 July 31, 2017, borrowings under the Term Loan bore interest at LIBOR +1.125% and the applicable interest rate for the Revolver was LIBOR +1.000%. 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.


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Other

Our available-for-sale securities as of July 31, 2017 consisted of investment-grade U.S. government agency securities, asset-backed securities, corporate debt securities, commercial paper, certificates of deposit, money market funds, and others. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer. As of July 31, 2017, we had no direct holdings in structured investment vehicles, sub-prime mortgage-backed securities or collateralized debt obligations and no exposure to these financial instruments through our indirect holdings in money market mutual funds. During the nine months ended July 31, 2017, we had no impairment charge associated with our available-for-sale securities portfolio. While we cannot predict future market conditions or market liquidity, we regularly review our investments and associated risk profiles, which we believe will allow us to effectively manage the risks of our investment portfolio. We proactively manage our cash equivalents and short-term investments balances and closely monitor our capital and stock repurchase expenditures to ensure ample liquidity. Additionally, we believe the overall credit quality of our portfolio is strong, with our global excess cash, and our cash equivalents and fixed income portfolio invested in banks and securities with a weighted-average credit rating exceeding AA. The majority of our investments are classified as Level 1 or Level 2 investments, as measured under fair value guidance. See Notes 5 and 6 of the Notes to Unaudited Condensed Consolidated Financial Statements. We believe that our current cash and cash equivalents, short-term investments, cash generated from operations, and available credit under our Revolver will satisfy our routine business requirements for at least the next 12 months and the foreseeable future.


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EBIT 2017 626 M
Net income 2017 316 M
Finance 2017 804 M
Yield 2017 -
P/E ratio 2017 39,67
P/E ratio 2018 32,40
EV / Sales 2017 4,03x
EV / Sales 2018 3,65x
Capitalization 11 602 M
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Mean consensus OUTPERFORM
Number of Analysts 9
Average target price 86,0 $
Spread / Average Target 11%
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NameTitle
Chi-Foon Chan President, Co-Chief Executive Officer & Director
Aart J. de Geus Chairman & Co-Chief Executive Officer
Trac Pham Chief Financial Officer
Antun Domic Chief Technology Officer
Hasmukh Ranjan Chief Information Officer & Corporate VP
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