益華電腦 (CDNS) 2001 Q1 法說會逐字稿

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Ladies and gentlemen, thanking you for standing by. Welcome to the Cadence Design Systems first quarter 2001 earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, you will need to press the 1, followed by the 4 on your telephone. As a reminder, this conference is being recorded Tuesday, April 17, 2001. I would now like to turn the conference over to Lisa Ewbank, vice president of Investor Relations of Cadence Design Systems. Please go ahead ma'am.

Thank-you. Good afternoon everyone and welcome. With us today are Bill Porter, chief financial officer, and Ray Bingham, president and CEO. The webcast of this call can be accessed through our website and will be archived for one week. Before we begin, the safe harbor statement. As of [mode] presentation, the following discussion contains forward-looking statements and the actual results may differ materially from those discussed here. Additional 2 information concerning factors that could cause such a difference can be found in the 10-K for the period ended December 30, 2000. All members reflect earnings excluding unusual items. With that, I will turn the call over to Bill Porter.

Good afternoon. Results for our business continued to be strong and steady as customers continue to invest in R&D and designs for next generation products in the face of what some of our customers have characterized as the steepest and deepest decline they have seen in years. Reflecting this continued investment, I am pleased to report that earnings per share, excluding goodwill and unusual items, were 16 cents or net income of $42 million. Q1 total revenue was $345 million, an increase of 34%, year over year, with product revenue totaling $181 million. Product revenue grew 72%, year over year. Software subscription license bookings were $100 million, 51% of software bookings, and well in excess of our target. Bookings under term licenses were 25% and perpetual licenses were 24%. In the past seven quarters, we have booked more than 500 million in subscription licenses, which is being recognized as revenue, over an average of two and half 3 years. In Q1, 36% of our software revenue came from subscriptions. Pricing of software and services continued to be firm, driven by a combination of increased value of new technology, and the discipline fostered by the subscription model. During the quarter, we added 40 new customers. Our customers have a continuous need to meet technology challenges by investing in new solutions. In addition, Cadence is in the midst of a significant contract renewal cycle. This renewal cycle does two things, provides a visible steady stream of renewable license revenue and allows us to get new technology into customer's hands on an easy regular basis. It's clear that

the model is working. Success with the renewal cycle continued in Q1, with two significant renewals in North America, at contract values more than 40% higher than the previous contracts. We have good visibility into the entire renewal cycle, and we expect to continue to have success. On the services side, the significant story is Tality, where we experienced greater than expected weakness in the quarter with small venture back companies, particularly in the wireless consumer communications portion of the business. Tality revenue was $44 million, an increase of [3%], year over year, and a decline 4 of 21% sequentially. The revenue shortfall came primarily from project cancellations and order delays and our decision not to recognize $4 million of revenue for work we've done for small venture back customers for which payment is in question. Methodology services revenue was $36 million, an increase of 9% year over year. We continue to deploy MS resources to support the product business, which is consistently looking for additional engineers to help proliferate new technology. As you can see from the strength of the product results, this strategy has been successful, and similar to Tality, we continue to evolve our engagements to those that are more strategic in nature. Ray will discuss the services business in more detail. Total services revenue of $80 million was up 6%, year over year, and declined 14% sequentially, the gross margins declining from 35% to 33%, year over year. Methodology services gross margins continue to show improvement. North America contributes 63%

of total revenue, with Europe at 17%. Japan came in at 14% and Asia Pacific at 6%. Regional breakdown will vary by quarter due to the timing of particular deals, but we will say that software bookings activity was strong in all 5 regions. The balance sheet continued to be strong. The [SOs] improved to 66 days, [HN] continues to be healthy, with receivables 90 days past due at 4%, not withstanding our decision to reserve $6 million for doubtful accounts in our Tality business. In this environment it is important to have as many of your risks covered as possible. To this end, we believe our account receivables, including those over 90 days, are adequately reserved. We invested $62 million to repurchase approximately 2.5 million shares of our stock. Ending cash balance was $112 million. Because of stock market conditions, we have decided to pull Tality's registration statement for the time being. It is still our intent to undertake an initial public offering for Tality when market conditions become more favorable. As a result, we wrote off the Tality IPO fees of approximately $3 million. Other unusual items booked during the quarter totaled $23 million, including primarily the CadMOS in-process R&D of $12 million for that recently completed acquisition. Also included is the amortization of deferred stock compensation. Looking ahead, we anticipate total revenue in Q2, will increase approximately 15%, year over year, and be about flat sequentially. Operating margin for the 6 quarter is expected to be in the 18% range. For the year, as a result of the lower services

outlook, we anticipate total revenue growth of approximately 18%, with product revenue growing approximately 30%. We expect service revenue to continue to be affected by the economy with modest growth expected for the rest of the year. We expect operating margin for the year to be in the 20% range. We continue to invest in research and development and customer relationships, while being extremely diligent in managing our costs. We are also implementing several targeted cost cutting measures including reduction and Tality manpower in the weakest market areas and redeployment of methodology services resources to the product business. And now I would like to turn the call over to Ray Bingham, our CEO.

Thanks Bill and good afternoon everyone. Thanks for joining us. Given today's uncertain business climate, we are very pleased with this quarter's results. I think they validate our view that customers continue to invest in design solutions even in a difficult macro environment. Our customers continue to invest in design. Most of those customers while announcing, in some cases, 7 layoffs and spending cuts, have announced their intention to increase R&D spending. For example, Intel as recent as today, TI have both announced just exactly that. They have significant technology challenges that doesn't change. They continue to invest in solutions that will enable them to bring new products to market. As you probably saw, in a Goldman Sachs semiconductor industry report issued a few weeks ago, looking at their universal semiconductor companies, they show R&D spending is expected to increase for all companies despite revenue [sharpness] or declines. In this year 2001, for example, total revenues for those same semiconductor companies are estimated to decline about 20%, and at the same time, R&D is expected to increase 11%. Beyond that, customers are reevaluating how they develop new products, how they bring them to market. In many cases, this is creating opportunities for Cadence to play a larger role in their businesses. In fact, difficult times like these serve to heighten our customer's focus on their core businesses and accelerate their willingness to move to partner with others for non-core activities. First, they flinch when they see these kinds of revenue declines. They 8 make tactical cuts in their expenses, for example, capital expenditures and contractors.

Then they evaluate and make fundamental changes in how they develop products. It's classic; we've seen it before. A high profile example of this is the recent Ericsson decision to outsource the manufacture of their handsets. I can tell you that we're having mini discussions right now with companies about ways we can expand our role to help them improve and manage their design infrastructure and to enable them to leverage their ability to design new products. It is actually a kind of opportunity for us. We focus on our results, specifically, recall that in the fourth quarter, we had the best quarter in the history of this company. As part of that great quarter, we built 132 million of product bookings that will be recognized as revenue over time in the form of subscription licenses. In the first quarter, the quarter just completed, we continued that trend with a great balance of higher product revenue together with more radical business. Our product business grew 72% to $181 million. We saw equally strong bookings growth which resulted in an additional $100 million in subscription bookings. That significant growth in visibility in our core business which accounts for almost 9 80% of all Cadence. In our emerging services businesses, both methodology and Tality, we did see some mixed results. In Tality, as Bill mentioned, in their design outsourcing offerings, we saw greater than anticipated weaknesses in the quarter where we experienced some push outs and some cancellations. I will talk more about Tality in just a second, but let me just have a word on methodology services. There, we continue to use our resources to help proliferate new technologies into the market. Now, is the time

to do that, and it's working. The strategy has been very successful as you will see in the details of our, in particular, our synthesis/place-and-route business, an area that is profoundly affected by capacity constraints because of the magnitude of demand for that new technology. And our fundamentals continue to improve. On the financial matrix, total growth margins for the company have improved from 64% to 73% over the past 7 quarters. Operating margins have improved markedly, and it's expected to expand more on its way to our target in the high 20% range. We have the strongest technology portfolio on roadmap in the industry and that combined with very strong customer relationships 10 that are becoming strategic value-added partnerships because of the way we work with them. Our close relationships with major electronics companies around the world are a great asset, an asset that matters especially in times like these and an asset that will drive long-term growth in our role as a design partner with them. When you look at the strength of our industry as a whole and the stability it has shown during past semiconductor down cycles and the predictability of our software product business, expanding margins and evolving customer relationships, and the competitive momentum we're demonstrating, we clearly have, I think, a compelling story. Let's look at the technology area for just a second. Customers continue to purchase from our entire suite of solutions. It is a pattern which seven of our ten top transactions, including tools from at least five of our product divisions. In the IC solution space, our digital IC segment led the way in the quarter for the entire company with bookings up more than 75% year over year. Within that, bookings of our traditional placing route products, Silicon Ensemble grew more than 50%.

Here again, we sold more than 100 seats of our ambit traditional synthesis solution as we 11 continue our strategy to see the market, giving us a stronger foundation for the synthesis/place-and-route opportunities of PKS, Silicon Ensemble PKS, and the new Integration Ensemble. Now a closer look at these new generation SP&R products. Understand that they are required even at times like this because of major challenges of deep sub-micron design including timing closure, complexity, and signal integrity. Cadence, it should be noted, continues to be the only company providing a complete front-to-back digital design flow today, from synthesis all the way through to final routing. It is big productivity for our customers in that it helps crunch the deep sub-micron problem. During the quarter, we added 21 new customers and had six repeat orders in this space, with bookings nearly quadrupling, year over year. We now have a total of approximately 70 SP&R customers, 20 of which have made repeat orders and many hundreds of seats in the market place. SP&R customers include such North American customers as Agilent, TI, Amber Networks, European customers like Philips and Ericsson, Japanese customers like Toshiba, Hitachi, Fujitsu, and many others. It includes 12 seven of the top semiconductor suppliers for this SP&R technology. As we're booking more than 110 million in SP&R last year, we believe we are solidly on track for more great results in 2001. We have made it easier for customers to get to their foundry in other ways. Toshiba America has completed its qualification of PKS and is now

pushing design kits out into its design centers. This marks the second major ASIC vendor with production PKS support. We've thus enabled [_______________] ASIC customers to use Cadence SP&R tools in a design aimed at the Toshiba foundry. In February, we introduced our new Integration Ensemble product which enables hierarchical design of large complex chips. Integration Ensemble, which runs on our new Genesis database and is the culmination of our Nano project, has generated considerable customer interest and several million dollars of bookings in the quarter. Our custom IC segment, where we have a very large, I would say, nearly 80% market share, also turned in a strong quarter with bookings for the quarter up 45%, year over year. Every single one of our top 20 customers purchased custom IC products. This is especially impressive since new products such as the AMS designer and Virtuoso custom designer are just 13 entering the market, and the new solutions coming out of the SuperChip initiative have just began to appear on the market. Texas Instruments, our first major partner on SuperChip, which will provide tools for the design of the most complex, mixed signal circuits both with large amounts of both analog and digital on a single chip, is well underway. Other recent announcements in the custom IC area include a pioneering collaboration with TSMC to distribute process design kits for analog and RF foundry silicon. Now this is a big deal. Most foundries operate only in the digital world, leaving analog mixed signal manufacturing to the IDM, the integrated device manufacturers. These design kits will allow our [CadMOS] semiconductor and systems customers to easily access and use the Cadence analog mixed signal

flow optimized for TSMC's processes. When you combine this new product roadmap with the continuing strength of our existing custom products, you can see that we are poised for many years of growth in this area. And it is also important to note when we look at our technologies that our physical verification products continue to make a comeback for us. Our bookings, year over year, more than doubled. Our 14 new Assura product continues to gain customer acceptance, appearing in three of our top ten deals in the quarter. Assura OPC which includes optical proximity correction technology from [_______________] won two major benchmarks, one in North America and one in Europe. We expect that it is sure to be a natural upgrade for our Diva custom verification product. [_______________] was selected by all of our top ten deals in the quarter indicating plenty of growth opportunities for Assura ahead. Now, on the systems solution space, results of our functional verification segment were affected by one part of that business, and that's the Quickturn emulation product business. As we had experienced in Q4, we did see customers delay orders, in our Quickturn business reflecting in adjustments to those customers, reflecting the adjustments and cuts in those customers' capital budgets. The approval process for these kinds of expenditures has lightened considerably, and some customers are making do with fewer machines. Nevertheless, we continue to see success in North America, including a significant purchase by a large microprocessor company; increasing success in Europe; and a doubling of our business in Japan. NC-Sim our mixed-language simulator and 15 verification cockpit, our simulation and analysis environment, both turned in very strong gains over a year earlier totals. Likewise, our

printed circuit board business continues to produce very strong results led by Allegro and SPECCTRAQuest which grew more than 30% year over year. And finally, in the system level design business, both of our system level designed products, SPW and VCC, play important roles in the integrated design [tool] targeted at the wireless market. It was just last week that at the Embedded Systems Conference, EDN Magazine named our VCC product the innovation of the year among EDA products. This is the third such award VCC has received. You can see that our IC and our systems solutions businesses continue to gain momentum as customers retool for the next generation design and renew significant contracts with Cadence. Demand is strong. The outlook is strong, and in particular, our business execution, I think, was excellent with 51% of that business booked as subscriptions. Now, to the services business and specifically Tality. Funding issues of start-ups, continued, and worsened through the quarter, resulting in cancellation or delays of a lot of projects. In 16 addition, as the quarter unfolded, even some larger customers cancelled their delayed projects reflecting their own slowing business environments and their inclination to get after capital spending and anything that [looks like a contractor]. In particular, we have seen a significant slowdown in the investment that companies were making in emerging wireless application devices, especially in the consumer market. This has significantly affected business in our wireless design group, one of our larger groups. Other parts of the business, including our digital and analog mix signal IC design groups and the data communication systems group, experienced some softness in their businesses,

but generally, held up well in this harsh economic environment. On the other hand, Tality's value proposition appears to be strong even in this climate. Tality's book to bill was greater than one during the quarter. With booking new business, 11 DOs in excessive of a million dollars, four of those greater than $3 million, and in a great example of strategic relationship, [one new one] of approximately $8 million. We are seeing companies continue to commit to multiyear, multiproject relationships with Tality that is evidenced by the deal we 17 announced in the first quarter with the cash of $34 million two-year agreement to supply product design services in the networking space. And there are more such announcements in the pipeline. The development of intellectual property also continues to be a key part of Tality's strategy. So, based on current visibility and the turmoil some customers are experiencing, we expect Tality's revenues and our planning for Tality's revenue to grow only modestly through the year with 2001 revenues roughly flat, with last year 2000. That means that revenues will grow modestly across the remaining quarters of the year as I mentioned. Based on a backlog in pipeline, visibility in Q2 is pretty good. However, we are in a harsh environment, and any unexpected cancellations or delays certainly could affect those results. In response to the difficulties we have seen in our wireless business, we will be resizing and restructuring it to meet demand. Specifically, we will be reducing our Tality workforce by about 140 people. That's about 10% of Tality. In addition, we will restrict hiring to personnel with critical skills and will temporarily utilize another 40 Tality people on needed Cadence 18

projects who would otherwise be hired from the outside. That will certainly help preserve our critical mass of talented engineers for a long-term growth within Tality. And of course, in this environment, we are reducing discretionary spending at Tality, as well as across the enterprise as one would do in an environment like this. By actions such as these and as markets recover, Tality's goal continues to be to be to reach profitability by the end of the year. Finally, it's important to note that we've not changed the Tality strategy. Companies continue to increase their focus on their core strengths and are partnering with others for the rest. We saw it in a major business we booked in the quarter; we see it in the pipeline. We believe this creates two important opportunities for Tality. One, as customers cope with the slowdown and begin to reevaluate their businesses, Tality can help. Two, as they wrap back up after the slowdown, Tality can play an important role for those companies as well. Let me turn to the methodology services area for just a moment. We continue here to see the opportunity to play a larger role in our customers' design processes and design infrastructure. A key example of our 19 infrastructure management role was Hewlett-Packard's recent commitment to outsource support of their PCB library environment to us. In the virtual CAD area, we have entered into several new engagements over the past two quarters. For example, Metalink in Q4 and added to that three more in Q1 where we help customers build, optimize, and manage design infrastructures on a leverage basis. Nevertheless, we are continuing to restrain MS revenue growth in order to apply our services resources in the product business, an important near-term opportunity to take advantage of the

significant growth that's available in that area. So, finally lets get back. We expect continued strong growth in the product business, approximately 30% this year even taking into account softness in the emulation business. Driven by continued investment by our customers in design and by accelerating adoption of our next generation solutions. Continued weakness in the economy may certainly temper services results, but the fundamentals of the Tality business continue outsourcing by customer relationships with large customers that have become strategic partnerships, and the ability to 20 aggressively manage Tality's cost structure to the demand that we see. It's just good management. It all builds very well for a long-term Tality success. For the enterprise as a whole, as Bill mentioned, we're looking at about 18% total revenue growth for the year, given the current economic outlook, with operating margins in the 20% range with continued expansion in margin as we move through this year. To conclude, customers today have the same problem they had yesterday. In fact, technology and business challenges are more acute. That makes even more critical for them to determine how to do design in a different way. That gives Cadence a big opportunity to continue to expand our role in the development of our customers' design infrastructures as we provide technology solutions, build and optimize customers' design infrastructure, in some cases, operate that infrastructure for them, and as with Tality, complete outsourcing of the design process itself. That explains why our product business

is so strong. I hope, it will also, what I believe, will propel us to an even greater role with customers as they find themselves revisiting the way they design products. So, with that, operator, let's open this up for question and 21 answer.

Thank-you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the 1 followed by the 3. If you're on a speakerphone, please pick up your handset before entering your request. One moment please, for the first question. John Barr with Robertson Stevens, please go ahead with your question.

Ray, my question comes out around the guidance going forward. And as I look to say on de-spending, growing at say 11% and the software business here growing 30%, the last time we had that kind of discrepancy was in 1998 when we kind of got ahead of ourselves on driving the business on the growth side. I hear all the arguments about spending through the downturn and all, but it's a big difference and just love to have your thoughts on that.

John, I think there are 22 huge differences to 1998. First of all, if you look at the licensing models that are being utilized and the amount of visibility this created in the use of those licenses over the last seven years, if you look at the more than $500 million of backlog that has been created by this action alone, that brings this quarter, I believe, about 36% of our business in from that backlog. There is a significant difference. After that, the renewal schedule that we see from major customers that today has delivered very large upside to the original contracts that were signed 2 and 3 years ago, that changes things, and then finally, I think that you can't overlook and you can see it in our numbers, the kind of new technologies that are being pushed into the marketplace as a result of the compelling need to be able to operate in the deep sub-micron space in order to get products out. Then, look at the health of the balance sheet on top of that. I think that it gets to be very understandable that this bears no resemblances to that time.

I hear, on the subscription side, you certainly do have a different business model, but the customers' environments haven't changed that much in the downturn, but that's my 23 question. Thank-you.

John, I am not sure what you mean by environment. If you just look at both the technology that's being adopted in the marketplace, as well as the compelling need to renew licenses when they become due in the shorter term licenses which did not exist in 1998. It simply wasn't there, the patent specific thing, but it didn't exist. I think that it's a completely different mechanism in place today.

Thank-you.

Our next question comes from Jay Vleeschhouwer with Merrill Lynch. Please go ahead sir.

Thanks Ray and Bill. I'd like to start with a Tality question. If total Tality revenues are going to be flat for the year as a whole, can you talk about what you expect the loss to be from Tality this year? By our calculation, you had a more than a $50 million operating loss from Tality in 2000. Don't you think it would be about that level this year? How do you get anywhere close to breakeven 24 by the end of the year unless you materially reduce expense to 10%? Headcount reduction doesn't sound like it would get you there. Secondly, to followup on John's question about R&D, you know, I concur that you are looking at about mid teens or so growth, but the planned levels of increase have been reduced. There would have been a higher growth rate starting at the beginning of the year, and those growth rates have come down. Have you looked at what your sensitivity is? If planned increases continued to fall to, let's say, 10% or less, what that would do to your software growth expectations, and then lastly, in the SP&R area, can you talk about the nature of competition there? In other words, there is a presumption that you and Synopsis, for instance, would both have reasonably good parallel upgrade cycles with your respective technology? Is that still how you see it playing out or do you see any changes in terms of customers increasingly going towards more self sourced kind of decisions?

Jay, let me turn the Tality question actually to the man that is responsible for delivering it. Bob Wiederhold, the Tality CEO is here with us, and I will ask him to 25 describe both the actions that are taken and the outlook for the business.

Thanks Ray. A number of things in 2001, I think, are very different than they were in 2000. In 2000, our digital IC business and our datacom business in particular were just picking up steam, and throughout the year, their performance continued to improve, and we will have the benefit of that in 2001, not withstanding the current economic climate. In addition, we continue to lower the G&A expenses. That was something, that was a key goal for us as a part of this separation from Cadence, and we are seeing the benefits of the work that we have done over the past 6 months and will continue to see benefits from that as well. So, we think that we have seen some problems, as Ray mentioned, particularly in our wireless business. That's the area that we have gotten hit hardest by far with this economic environment. The actions that Ray mentioned that we'll take in that particular area, and we think that by scaling that area back and by continuing to grow the rest of our businesses moderately, that we cannot only hit the current revenue expectations that Ray mentioned earlier, but that we can stay 26 on our path to profitability by the end of the year. Jay, you also asked about sensitivity to R&D investment. I don't know how one would correlate the difference between 10% growth and 11% growth to EDA spending. I think that they are very different things and impossible to correlate. I wish I knew how. I will tell you

that we believe that we have modeled the rest of the year as we operate our business with an eye to what might go bump in the night. We think we have modeled the services revenue stream and the cost associated with it, both Tality and methodology services, with a strong eye to the kind of risks that are in the market place. We think that upside is possible. We have done the same with our product business. But in the product business, we have a particular advantage. A very significant part of our business going forward is subject to either the subscription that rolls in from the backlog that we built over the last 7 quarters, and even a larger part, it's something that is the subject of contract renewals where the customer really has engaged with Cadence on a time basis, and at the end of that time, the license is simply turned off. We work with those customers very actively for well in advance of that renewal, but the renewal is a, 27 if there's a compelling deadline, it has to happen, and in the planning with those customers, many of them are customers that have been in the news, that are laying off people, that are reporting significantly lower revenues, in some places losses, are still investing in design and really don't have a choice if they are going to design at all, but to renew the licenses, and our experience to date has been renewals in excess of 40% above the original contract price. In terms of SP&R, I think the nature of the competition sorts out for us here. You can see that we are

posting very impressive numbers, and we are doing so on the strength of great technology and a powerful implementation engine coming out of our AE and methodology services force. We believe that we win the vast majority of benchmarks that are out there. We have added a lot of new customers, and those customers are beginning to proliferate. If you think about it in terms of general [_______________] of the market, we see older customers still using both Synopsis and Cadence, and they are upgrading to the Cadence back-end PKS and Synopsis front-end physical compiler. There will be a convergence in some point perhaps, but for the moment that is the way 28 the market seems to be sorting out. New customers on the other hand, particularly startups, are more frequently going to just Cadence. If we look at the, for example, the [30K balance] that we have been able to confirm, more that half of them were full front-to-back Cadence [SP&R-Flows]. That's unique in the marketplace, and that gives us a compelling argument with companies that have [_______________] deeply invested in Synopsis on the front-end and Cadence on the back-end.

And if I could just clarify the question about R&D was not to compare 10% versus 11%. It was to compare mid teens growth, let's say, for R&D to something materially below that, let's say, if R&D were to fall to only single digit and not just 10%.

Pardon me Jay, I was just making an example. Next question please.

Thank-you, your next question comes from Jessica Kourakos with Goldman Sachs.

Hi, thank-you. Good evening. I have a lot of questions. I guess if you could just clarify a little bit in terms of 29 Q2 guidance. I think you mentioned that revenue growth for Q2 is expected to be in the 15% or so range. Does that assume negative sequential growth in services? That's my first question. Two, if could you could talk about a little bit about the pricing environment, and if you're seeing any, either from yourselves or just the competitive landscape, if you are seeing more discounting taking place now, then maybe in the last couple of quarters. And also I guess, you know, on the software side, again, going back to sort of what's going on with the environment, if you could talk about at the end of the quarters, are still you seeing or are you seeing any more red tape to filter through in terms of closing deals or are people adding an extra bureaucratic layer to make sure that spending is being contained. And along the same lines, do customers that are renewing with you, that are very large customers, I guess what kind of ability do they have in terms of maybe increasing the time frame when they have to renew by maybe an extra month or two months? I guess do they have any flexibility to maybe get that extra one month or two month extension? And then on the Tality side, and this is my last question, I 30 promise, I guess what kind of stability do you have on the management side within Tality given the fact that you are making a lot of changes there? Thanks.

Jessica, this is Bill. I will take the first slug and then we will work through them. In terms, of the outlook, we do not see negative growth in services in Q2, so slight increase, but that's how we see it. In terms of discounting, pricing has continued to hold firm, and I went through all of the large deals, and our discounting has not changed significantly from the last few quarters, and to be specific it's under the 30% level, so we are seeing good discounting control at least in our business. In terms of end of quarter, we really didn't see a lot of additional red tape at least from our perspective in the software business. In emulation, they have continued to run into difficulties of the capital expenditure loop. That has been extended and delayed, so that is clear, capital is being more difficult to get approved and it did impact our Quickturn business. We saw actually good linearity in the quarter, so we saw a number of deals booked early in the quarter, and of course we saw our normal 31 large push at the end of the quarter, so there is a combination of both. But we did see a good mix early. And finally, in terms of flexibility, we really don't have a flexible program that allows customers to continue to extend their licenses, when they are up for renewal, and of course, we are going to work very closely with our customers, but there isn't any ability to extend. They are contractually committed, and they do turn up on time.

Okay.

On the stability of the Tality management, there aren't any changes in the Tality management, and we don't expect that there will be. We are still very excited about the business going forward. We certainly are affected by the economic environment right now, but we are very, very optimistic about the future of the business, and we are seeing lots of very good things in our business despite some of the difficult times, and Ray eluded to some of those. Some of the very strategic relationships we're putting up in place with our customers are an indication of the kind of success we can have in the future, so I think we all are excited about that. 32

Right, thanks Bob.

Our next question comes from Erach Desai with Credit Suisse First Boston.

Good afternoon. A couple of questions. One, I guess going back to the guidance issue, and I guess, Bill and Ray, what I am trying to understand is if as you suggest you have been in the renewal cycle experiencing a [_______________] cycle. Your revenues were down 12% sequentially versus maybe 5% down seasonally on a historical basis. Your product revenues were down 16% sequentially versus about 8% on a historical level. If you give services guidance for Q2 to be slightly up, maintenance goes up, then product revenues would be slightly down sequentially. How do we corroborate these sequential trends with the strength of the business given that Q1 2000 was a negative comparison for growth rate? First question.

Erach, actually, we don't see the product business down. We see it flat relatively in Q1 to Q2, and that just has to do with a lot of the scheduling of the renewals. 33 We see how that business looks, and maybe to the question earlier, we are not trying to stretch this business. We see where it naturally happens and where it gets the most value, so that's I think a very strong outlook for us that continues to get stronger in second half, but that's really the outlook for Q2.

Okay, still doesn't, but that's fine. It still doesn't explain why there is not much sequential momentum if you are having a lot of upgrades going on, but let's leave that for a second. What happened in Japan sequentially? You were down about 34% in the seasonally strongest quarter, any additional emulation deals that didn't work your way or what was that?

One other point, Erach, on the previous thing that maybe you are not taking into the consideration is the strength of the subscriptions that we booked in Q1 as well, so that again is a strong piece of the business, that doesn't show up just on the top line.

Okay.

Okay, in terms of 34 Japan, I think that business really hasn't taken off yet, so I think customers were continuing to renew as they need to, and we actually saw some good business in Quickturn. It grew in Japan in the quarter, so that's not really the reason. It's just that's the pace of growth in Japan, and I think we have indicated for quite sometime the business is steady, but we really don't see it picking up in a dramatic way except as customers need to renew.

Okay, I think, Bill, you provided this a little. I must have missed it. What was the license revenue mix by license type? Did you say 36% or 31% of software revenues were ratable [of] subscription?

I said 36%, Erach, in terms of revenue from the ratable portion of subscriptions.

36% of product revenues, correct.

Yes. That's correct.

And what was the mix between for perpetuals. 35

That's approximately the same mix as the bookings.

Okay, and one final question, then I'll let you go. There was this charge that you referred to, but on your income statement, you broke it out into a $17 million charge and a $5 million for deferred stock compensation. That's a one time, or you are not going to have that recurring, correct?

Well, the deferred stock continues. That's the cheap stock charge we [gather] from Tality's registration. The [CadMOS] which is really the one time charges, your normal in-process R&D charge, and then, there was a small one-time charge relatively small for the IPO cost we wrote off.

So, in the prior models, we didn't have this deferred stock compensation charge.

No that's been there for quite a while. It has been sitting as a separate line, so we can talk about that. It was in.

It was there year over year ago. 36

No, not year over year, but it's been there since the Tality, since Q4 when we went through the Tality [_______________] in Q3.

But not on a year over year comparison basis.

Not on a year over year, but one of those non-cash items that is not included in [EBG].

Gotcha. Thanks.

Okay?

Our next question comes from David Veal with Morgan Stanley.

Just one quick question. Wondering if you are seeing any sort of changes in the pattern of customer buying in terms of size or duration of deals. Thanks.

David, we really haven't seen any significant change in the deal type or size, still looking slightly less than ten quarters, and the mix continues to be, I think, a pretty healthy mix of the different 37 types of business and the size really hasn't varied significantly in terms of the average deal size.

Great, thank-you.

Our next question comes from Garo Toomajanian with Dain Rauscher Wessels.

I have a few questions for you. The first one is as you've modeled again the Q2 guidance, it sounds like things are flat, which means that we should see an uptake in Q3 and Q4. Is there a large dependence there on a small number of significant renewals? I guess, the next question would be, you did a Mitsui emulation acquisition. Can you talk a little bit about what you see the revenue impact and earnings impact being this year and also if you think that there is a chance of additional risk on capital expenditure that could affect the emulation business?. Lastly, two other things, the first is that do you anticipate changing your model for the subscriptions bookings since they have gone up quite a bit over the last several quarters to the almost 50% range, and final question is, G&A took a big jump sequentially. 38 Is that related to the Tality write-off or is that some other things that we should be looking at going forward?

Sure Garo. In terms of the second quarter, we don't have any, again, real large deals that we are dependent on. There are few a [renewals]. We have really a pretty deep pipeline through the second half in terms of renewals. In terms of the Mitsui arrangement, that's primarily a technology that will be incorporated into the Quickturn technology. That shouldn't have any immediate revenue impact, but it's good technology we think will have a value later on into the year. In terms of risk of emulation, we think we have conservatively modeled that into our guidance. So, we think we have looked at that, but of course, there is risk if people completely shut off emulation. I don't expect that to happen. In terms of your model question, as we have said before, we are not going up the ante in terms of erasing our model just based on individual quarters. I think we saw good mix of subscriptions, but we still see 40% [as] the right bar these days, and that's how we are really trying to gauge the business. So, 40% is what I would expect to be the goal that we 39 are shooting for in terms of a good [subscriptionist]. And then finally G&A, yeah that increase is the Tality bad debt charge of $6 million.

Okay. So we would expect that to go down then sequentially into Q2?

Correct. That should not reoccur.

Thanks. Thanks very much.

Our next question comes from Raj Seth with SG Cowen.

Thank-you. Most have been answered. A couple of quick ones. Bill, if there is any sort of pattern in the kind of products people are tending to take on subscription versus the other license models, can you talk about that? Ray talked about a substantial portion of the second half coming from renewals and the subscription backlog. Is there any way that you can size that in order of magnitude on the product revenue side? And I am curious if you would hazard a guess at top line 40 growth in 2002 on the product side.

In terms of the subscriptions, I don't think there is a real clear pattern emerging, Raj, in regards to the type of business. What I recall seeing is more of the new technologies, including SP&R, are primarily in subscriptions because they like the access to the new technology. That's really customer dependent. I think it more leans towards the digital SP&R technologies. In many cases, the more, yes, stable technologies, they are just assuming can get a term license and not pay for the premium to get the subscription license, but some just will get all of their technology in one or the other. In terms of size of the renewal base, yeah, I do think, on a bookings basis, towards the second half of the year or in the second half, there is a good percentage or 50% of our business we could model with renewals. So, we think it's very healthy and very stable mix.

Correct me if I am wrong, but if 50% is from renewals, and you are coming into quarters, I am just trying get this, if you are coming into quarters with 30 some percent from subscription, is the implication that most of 41 that product revenue that you have modeled is effectively off of this renewal cycle and subscriptions or did I double count?

Well, I was talking about the bookings, not necessarily just of revenue.

Okay.

Okay.

Yeah.

There's I think still very good visibility for the product business and the natural type of license will fall, but as we mentioned it probably is at least 40% subscription and may be higher.

Right. Any guess on 2002.

I think it's probably a little premature to look at 2002, but overall growth I don't think changes from what we saw before. If the economy, you know, doesn't completely go downhill, I would expect long-term growth should be in the 20% plus range.

Okay. Thanks.

Our next 42 question comes from Michael O'Brien with Wit Soundview. Mr. O'Brien, your line is open.

Thanks very much [_______________] Michael O'Brien. I have two questions that [_______________] clarification. Most of my questions have been answered. First one is, could you clarify the subscription booking growth for the remaining of the year and secondly in terms of place-and-route, last year you entered 2000 with almost 300% growth, and what's your [take on that kind] of growth entering 2001?

[_______________] I am not sure I got your question, but in terms of subscription booking, still look at that being in the 40% range throughout the rest of the year. Was that the question you were after?

I am just trying to clarify the 30% and 40% because there are two sets of numbers that came up, but.

Okay, let me try. In terms of Q1, we had 36% of our revenue from subscription. In terms of bookings, we had over 50%, and then moving forward, bookings, the goal 43 still is 40% of our bookings being subscription.

Okay and what about the place-and-route? Could you elaborate on the growth going forward?

Is that growth in the place-and-route area?

Yes.

Well, just to reset, last year we saw, for the whole year, 40% growth in the SP&R space. In the place-and-route space, we saw 300% growth in the new generation products. This year, we have just seen in Q1, 50% growth in traditional place-and-route, so comparable to the 40% last year and 400% growth in the new generation products in Q1.

Can you elaborate on going forward?

No, that's not something we will project. We certainly expect this to continue to be a very hot area, but I don't know that I would project it. Thanks. Operator, I think with that I'd you ask to close to call and let me add our thanks for your participation today. 44

Thank-you. Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect and thank-you.