益華電腦 (CDNS) 2004 Q3 法說會逐字稿

Good day everyone, and welcome to the Verisity Third Quarter 2004 Earnings Conference Call.

Today’s call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Charlie Alvarez, Verisity’s CFO.

Please go ahead sir.

Thank you.

Good afternoon.

This is Charlie Alvarez.

And on behalf of the Company, I’d like to welcome you to Verisity’s Third Quarter 2004 Earnings call.

On today’s call I will highlight the financial results for the September 2004 quarter.

Moshe Gavrielov, our CEO, will follow with the discussion of the highlights of our operating performance, overall design environment, and market opportunities.

Then I will finish with our outlook for the remainder of 2004.

After that, we will be happy to take your questions.

As a reminder, this call is being web cast and recorded, and will be available for replay in our Investor website page, at www.verisity.com.

Before beginning my comments, I will read the following Safe Harbor statement.

During the course of this conference call, we will make forward-looking statements.

These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially.

These forward-looking statements include, but are not limited to, statements with words like expect, believe, anticipate, continue to, may, potential, will, or the negative of those terms.

For a discussion of the relevant risks, please refer to the risk factors section of our most recent SEC filings, including the Company’s Form 10-K, filed on March 12, 2004, and Form 10-Q, filed on August 6, 2004.

Additionally, during the course of this call, Moshe and I will be making reference to pro forma net income loss, and net income loss per share, that excludes certain non-cash charges, and that have not been calculated in accordance with GAAP.

These measures differ from GAAP in that they exclude non-cash charges related to equity issuances, amortization of cash-based deferred compensation, and amortization of intangible assets, all resulting from the acquisition of Axis Systems, which was completed on February 9, 2004.

For a more complete discussion of the nature of these pro forma items, please refer to our Form 8-K filed on April 22, 2004.

Verisity provides these measurements in addition to GAAP financial results, because it believes they provide a more consistent basis for comparison between quarters, that is not influenced by certain non-cash expenses, and therefore provides a helpful alternative perspective to understanding Verisity’s underlying operational results.

Further, these pro forma measures are some of the primary measures Verisity’s management uses for planning and forecasting.

These measures should not be considered an alternative to GAAP.

And these pro forma measures may not be comparable to information provided by other companies.

We are very pleased with the financial performance that we achieved in the third quarter.

Bookings grew sequentially, as we received the orders we expected from our strategic customers.

Revenues grew sequentially, and exceeded the high end of our guidance we provided in our last call.

We also achieved profitability on a non-GAAP basis, earlier than expected, and reported a non-GAAP profit of $146,000.

We continue to maintain a strong balance sheet, with over $56m in cash and cash equivalents, and generated over $3m in cash from operations.

I will now review the financial highlights of the third quarter, which ended on September 30, 2004.

On a GAAP-basis, after the effects of purchase accounting, we achieved revenue of $15.5m, exceeding the high end of our guidance range.

This was up 13% sequentially from the second quarter of 2004.

License revenue was $8.6m in the third quarter, up 10% from the second quarter, and contributed about 55% of total revenue.

In the third quarter, maintenance revenue was $6.7m, up 18% from the second quarter.

And revenue from other services of $223,000 represented the balance of total revenue.

Revenue in the third quarter from time-based licenses accounted for 97% of license revenue, an increase of 91% of license revenue in the second quarter of 2004.

Time-based license revenue was up 18% sequentially.

Existing customers accounted for approximately 97% of revenue, and 95% of bookings in the quarter, consistent with past quarters in our ratable model.

Our bookings this quarter improved sequentially and year-over-year.

As a result, our book to bill ratio, which is our book to revenue ratio, was favorable.

We reported gross margins of 89% in the quarter.

Operating expenses, excluding non-cash charges, were $13.8m in the quarter, a sequential increase of 2%.

This expected increase in 3Q expenses reflects additional investment to integrate our product lines, plus costs associated with Sarbanes-Oxley requirements.

Expenses did not grow as much as we expected, as we were still looking for specific technical talent for our R&D efforts and channel development.

Non-cash charges related to equity issuances, amortization of cash-based deferred compensation associated with the merger, and amortization of intangible assets, were approximately $5.4m in 3Q.

Non-cash charges increased, due to the acceleration of compensation charges associated with the previously announced departure of Mike Tsai that occurred in Q3.

Other income and expense was a loss of $93,000.

The effective tax rates of the third quarter was 41%, again largely due to the addition of Axis.

Our GAAP net loss for the quarter was $3.3m, or $0.14 per basic share, based on 23.5m basic shares outstanding.

Our pro forma net profit for the quarter was $146,000, or $0.01 per fully diluted share, based on 23.5m fully diluted shares outstanding.

This pro forma income is based on GAAP revenue.

And this exceeds our guidance of a net loss of $0.01 to $0.02 per share.

Turning to the balance sheet highlights, cash and cash equivalents were $56m at the end of the third quarter, up $2.9m from the June 30 end of the second quarter.

Accounts receivable ended the September quarter at $12.1m.

The average weighted days outstanding for the September ending receivables balance was 11 days, an improvement from 14 days in the second quarter, and well below our target of 30 days net payment terms.

Traditional DSOs were 71 days at the end of September, also an improvement.

Again, DSOs are not the best metric for the health of our receivables, due to the predominantly ratable revenue model.

But, more importantly, our receivables continued to be very healthy, measured by their aging.

Total deferred revenue was $37m at the end of September.

And this represents the billed or paid up portion of the backlog that will be reported as revenue in the subsequent quarters.

That completes the highlights of the September quarter.

And I will now turn the call over to Moshe for his comments.

Thank you Charlie, and good afternoon to you all.

This is Moshe Gavrielov, CEO of Verisity.

Third quarter of 2004 was clearly an excellent quarter, with continued crisp execution on numerous fronts, of the new Verisity’s broad front-end technology strategy.

The highlights include setting record revenue of $15.5m, achieving pro forma profitability of $0.01 per share, positive book to bill ratio, accompanied by healthy expansion of our backlog, the generation of well over $3m of cash from operations, continued focus on our predominantly time-based business model, with well over 90% of the Q3 bookings falling into this category, significant expansion reorders, and renewals from our key semiconductor systems and star IP customers, on both our hardware platform and software VPA products, all in highly competitive situations, and ongoing success in the customer rollout of our new product lines.

In the third quarter, Verisity continued its momentum, with both the major and the mid-sized semiconductor companies.

This was driven by very significant follow-on deals struck with six of the top 20 worldwide semiconductor players.

Additional substantial orders were received from the leading North American communication semiconductor companies.

The resulting percentage of revenue contributed by the semiconductor sector was approximately 51%.

On the systems side, significant orders and multi-year agreements came again from leading customers from all three major geographies.

Generally speaking, we’re seeing encouraging growth in this market.

The overall percentage of Q3 revenue contributed by the system sector was approximately 41%.

In addition, we received substantial orders from three leading players in the star IP marketplace.

Revenue from smaller customers, which includes the IP companies, came in at 8%.

Continuing what now has become a clear trend, several of these orders from the key customers in all three categories constituted the expansion of longer-term multi-year purchases, and the early deployment of licenses.

This trend clearly highlights our customers’ increasing commitment to our leadership technology.

In terms of the industry environment, we continue to see encouraging activity in the overall design realm, and the scope of projects being pursued by our customers.

This is particularly evident in our international markets.

As reported by other EDA companies, development budgets continue to be scrutinized very carefully.

We expect this climate of ongoing caution to continue through the end of the year, and into 2005.

Notwithstanding these statements, we have a burgeoning pipeline for all of our product offerings, and absolutely expect a seasonally very strong fourth quarter, yielding record revenue.

On the technology front, the new Verisity continues to crisply execute on its expanded product offering, in the broad front-end verification market, utilizing three highly synergistic product lines.

The first is the enhancement of our industry leading software VPA product line.

This includes the newest version Specman Elite, vManager and eVerification components.

Driven by our customers’ demands, we continue to invest very heavily in these products, and enhance them to meet the exploding logic complexity requirements of their emerging 45, 65, and 90-nanometer semiconductor product.

Our customers continue to tell us that these products are unparalleled in terms of their capabilities.

The positive benefits of their usage are very apparent to them.

At a recent meeting of the leading verification technologists from a large North American based communication system company, they mentioned that they had broadly used Specman Elite on 12 high complexity programs.

To their delight, have delivered all 12 of these products with 100% success rate.

This means there were absolutely no functional bugs, and no software workarounds required.

This phenomenal success was directly attributed by them to their ubiquitous and aggressive usage of Specman Elite.

These successes and the ensuing value proposition are further enhanced by a new and unique vManager product. vManager provides the means to automate the tasks of planning diversification process, effectively deploying hundreds of parallel simulations to implement it, analyzing the resulting failures, and generating useful reports for management.

Its value is becoming very apparent to our leading customers, so it’s already generated tens of active engagements.

It has, very early in its lifecycle, already translated into numerous multi-license customer purchases.

One of our large semiconductor customers committed to tens of licenses in their first ever purchase order of this product.

In parallel, the second product line is comprised of our hardware platform products.

Our flagship Xtreme Server product, announced in May of this year, is basically rolling through what is a very timely and successful customer introduction, continues to deliver numerous competitive wins, which have already resulted in numerous sales to our leading platform customers.

We’re delighted with the results to date, and are totally committed to continuing to invest heavily in the expansion of our hardware platform business.

This is relevant on the R&D side, where we’re developing the next generations of products, with increased capacity, higher performance, and increased functionality.

It’s also very apparent on the field front, where we are rapidly growing the technical field resources to support our worldwide customers, to reap the very significant opportunities this product line provides.

Notwithstanding the success of the existing standalone VPA and platform products, the most significant future growth potential for the new Verisity continues to come from solutions that combine the most advanced technologies of both of these product lines.

SpeXsim, which is the first of these integrated products, has hit all of its key product targets.

This pertains to the all important competitive performance, true multi-language support for Verilog, VHDL, SystemC and E, compatibility and ease of use.

It was released to beta, and first customer ship on schedule, and is already engaged in well over 10 meaningful evaluations.

One of these has already yielded the first purchase from a very strategic customer, providing a truly positive indication of the value of this product at a very early point.

To summarize, I am very pleased with Verisity’s overall execution in Q3, and convinced that our robust pipeline, driven by our new and broad product offering, will enable us to deliver another record quarter in Q4.

I’ll now hand it back to Charlie, to provide our updated Q4 projections.

Thank you Moshe.

First I will iterate our earlier cautionary statements about the uncertainties we face with respect to forward-looking statements we make in this call, as well as the outcome of our operations relative to those forward-looking statements.

We cannot assure you that our results will be consistent with these statements, due to a number of factors.

Please refer to our recently filed form 10-K and 10-Qs, for more detailed explanations of the risks we face.

We do not plan to update, confirm, or change this guidance until our next earnings conference call, except by a press release in the case of material events.

This is consistent with regulation FD.

I will now move to a summary of our outlook for the balance of fiscal year 2004.

As Moshe mentioned, in Q3 we achieved significant re-orders for both our EPA and platform solutions, and have received positive feedback and interest from our customers, who are evaluating our new, integrated solutions.

We continue to see healthy front-end design activity in our key strategic accounts.

Notwithstanding this activity, customers continue to manage their resources carefully, and invest in solutions that are critical to their overall success.

Many customers, particularly semiconductor companies, experienced a challenging quarter, and continue to closely manage the quantity and timing of deliveries of new licenses, which can delay related revenue recognition and expect some customers caution in respect to the timing of delivery of new licenses to continue into 2005.

We remain committed to our ratable revenue model, with time-based licenses contributing 97% and 94% in the third quarter, to licensed revenue and bookings, respectively.

With the last four quarters of greater than 90% time-based bookings to total license bookings, we have very good visibility entering our fourth quarter.

Our outlook for the fourth quarter and beyond remains cautiously positive, with a continued growth in bookings, and more modest corresponding effect of revenue growth.

We expect revenue for the fourth quarter of 2004 to be approximately $16.7m to $17.m, up sequentially between 8% and 10%.

The target gross margin for the fourth quarter is between 89% and 90%.

With our plan on deepening our commitment to R&D in order to develop our next generation solutions and expand our technical resources and channels, we expect operating expenses, excluding non-cash charges, to grow sequentially by about 7-8% for the December quarter of 2004.

The distribution of these expenses, by function, R&D and SG&A, to be approximately in the same proportions as in our actual results for the third quarter 2004.

Non-cash charges related to equity issuances, amortization of cash-based deferred compensation associated with the merger, and amortization of intangible assets, are expected to be approximately $2.5m in the fourth quarter of 2004, and $13.1m for the year.

We expect other income and expenses line to be a net income of about $120,000 in the quarter.

We are using an effective tax rate for forecast purposes of 28% in the fourth quarter, and 39% for the year.

We will be further analyzing the effects of the Axis merger on our tax model, and will refine this more as more information becomes available.

We expect the basic weighted average shares outstanding in the fourth quarter for earnings and loss per share purposes to be about 23.6m shares.

And we expect the fully diluted average shares outstanding to be about 24.3m shares in the fourth quarter.

Due to GAAP losses, basic shares outstanding are used instead of fully diluted shares outstanding.

The foregoing guidance should yield a GAAP loss per share of about $0.05 to $0.06 per share, and a pro forma income per share of about break-even to a penny a share in the fourth quarter.

For the year 2004, this guidance should yield revenues of approximately $57m to $57.3m.

We believe with this revenue range, along with a focus on execution, we can yield GAAP loss per share of between $0.39 and $0.41 per share.

We now expect our pro forma loss per share to be between a $0.05 and $0.06 loss per share in 2004, about a 2% improvement over previous guidance, on approximately 23.5m shares outstanding.

We are currently in the process of planning and budgeting for 2005.

And we’ll provide guidance for 2005 in our January earnings conference call.

In summary, we’re very pleased with our financial results.

We’re delivering on our product roadmap, and further strengthening our competition position as a front-end provider of leading VPA solutions.

This concludes our comments.

And at this time, I will open up the lines for q-and-a.

(CALLER INSTRUCTIONS).

Rich Valera with Needham & Company.

First, just on the sort of competitive landscape, I was wondering if you could just talk about how you see the competitive landscape.

We’ve heard about, on some of the other smaller vendors’ calls, that the bigger vendors are maybe on the margin, even getting a little more aggressive about things like bundling and pricing.

Just wondering how you’re seeing the climate out there with respect to competition from the larger vendors.

Generally speaking, in order to get a lot more aggressive, they’ll need to start paying the customers to take their software.

So I don’t think that’s part of their business model.

So I think they just sort of continue with the same practices.

I think they’re fighting very hard for every piece of business, as everyone else is.

And I don’t see a huge change in that respect, either with their strategy or their tactics.

Great.

And on the R&D, I guess, for this quarter, it looks like you’re expecting OpEx to be up pretty significantly, with a big chunk of that R&D.

Are you thinking you will be able to hire those engineers you weren’t able to hire in the third quarter, to get that R&D up where you’re looking for it to be?

Yeah, we’re hopeful that we can.

We’ve had a real good recruiting month in October, and have had quite a few folks that were sort of in the pipeline for us, and have joined us, and a few more will soon be joining us.

So that seems to have success there.

And finding the right talent, and bringing them on board, seems to be picking up for us.

So we’re pretty optimistic we can at least make a dent in that this quarter.

Great.

And one final question, just with respect to the details of the Axis products.

Can you give us a sense of how it is there, relative to the traditional Verisity products in the last quarter?

We’ve had success on all of the product lines.

And we are very pleased with the results on the hardware platform side, in particular with the new Xtreme Server product.

It’s really doing very well, and we’re seeing repeat business already from customers who have just bought it are some of them have already bought more of the same technology.

So we’re very pleased with our results.

And that’s why we’re continuing to invest.

And actually we’re going to increase our investment in that area.

That’s a very true statement with respect to the order flow.

In terms of revenue, keep in mind that, because of purchase accounting, we started with almost no backlog that we could report.

There certainly was backlog there.

But we couldn’t report it.

So those orders that are coming from the platform side are building into revenue now.

But we’re kind of building from a lower base there.

So the revenue contribution is picking up, but is not exactly where we’ll be, I think, in steady state.

But certainly the bookings are very encouraging.

Great.

Thank you.

Jennifer Jordan with Wells Fargo Securities.

I was wondering if you could talk a little bit, Moshe, to what kinds of things are the trigger points for customers deciding to turn on to your technology, particularly to adopt the Xtreme Server versus some other type of emulation, or not using acceleration at all.

And at what point does that become more widespread in terms of usage?

Well, you know there are basically three elements which drive those sales.

And there is a pretty broad range of applications that require that sort of hardware enhancement in terms of performance.

And the three elements are the functionality, the performance, and the ease of use.

And for our hardware products, we think by far the differentiator which drives our success is the ease of use.

It’s architecturally built into the product in a way which is unique.

And none of the other approaches can touch our capabilities in that regard.

With regards to your question, what will enable us to accelerate this even more, it’s the methodology and the tie in that we have between our VPA products, and the hardware platform products.

And in particular, there’s the ability that we have developed and we’re in the beta phases of, which is called SpeXtreme, which is a combination, which enables the even smoother transition of an entire solution from a software only path to a hardware path, without compromising too much of the performance.

And we believe that once that is out, that will help accelerate the growth.

And a lot of our existing software customers could become potentially customers of the hardware products too.

Okay.

The other question that I have relates to a few months ago there was a lot of discussion about the coming of system Verilog, and how it might influence the market.

And now we really aren’t hearing that discussion.

I was wondering if you could comment on what you’re seeing among customers, and what you’re seeing in terms of the system Verilog movement.

Well, we are obviously -- the customers are voting with their feet, or in this case with their wallets.

And they’re clearly continuing to invest very heavily in our technologies.

We believe that system Verilog will provide a solution to a certain subset of the market.

And that, by the way, is a subset that we believe we’ll be able to address too.

So we’re not in any way concerned about that.

But, in the interim, until that will be available, we’re seeing a tremendous growth in our business.

And we’re just continuing to sell more and more technology, and differentiated technology to our customers, which will be well ahead of what system Verilog will provide when it does become available.

And finally, two last questions.

One is that most of the other EDA companies have experienced some pressure on bookings this quarter, due to uncertainty in the semiconductor industry.

What’s making it so that you are bucking the trend?

Is it really just the demand for greater levels of functional verification, because things are getting so complex, and that’s outweighing the conservatism in purchasing?

Or is there something else?

Well, the conservatism and leveraging in purchasing is as high as it always has been.

So what I think is enabling us to handle this better than most, significantly better than most, evidently, is the -- two things.

One is, as you pointed out, even if the number of designs is going down, the complexity is going up.

And as they move to new generations of technology, the date count just explodes.

In addition, and helping supplement that, is the fact that we’re truly rolling out a new set of products and a much broader set of products.

And I think we’re addressing now a much larger market than we were before.

And that is helping us to grow things, both on the bookings and the revenue side.

And I think maybe some of the larger players are selling into saturated markets, where we’re attacking new markets, which are not as well served, with a broader product offering.

And I think that fundamentally makes it easier for us to grow even in a challenging environment.

Great.

Thank you Moshe.

Dennis Wassung, with Adams, Harkness & Hill.

Thank you.

A few questions guys.

I am curious Moshe, you talked about some detail on the SpeXsim product.

And I think you gave a number in terms of well over 10.

I guess, I don’t know if it was significant evals in progress.

And there was also another statement about, I guess one customer in particular.

Can you go over that in a little more detail?

Okay.

So on SpeXsim in particular, what I mentioned is we have over 10 evaluations.

And most of those are being done at our large existing customers.

And SpeXsim is a product that enables a path to replacing the regression simulators of -- the customers might be using.

And we’re really, since we already have much more than a foot in the door with these customers, because they typically are all big Specman providers, it’s relatively easy for us to start an evaluation.

What is a little harder to do is to land the deal, given that these are new -- this is a totally new product, which actually only hit its SDS in Q3.

And we were quite pleased with the fact that one large strategic customer has already made a financial commitment and purchased that.

We obviously expect that to be the tip of the iceberg.

But -- and know as this continues to move forward, and we demonstrate the functionality and the performance, and the ease of use, our expectation is that this will become a significant player in terms of revenues.

But that isn’t an immediate.

It will happen probably in 2005, for that specific product. vManager is already happening.

And, as I said, we have numerous purchases.

And all of those, or most of them, are actually of a large number of licenses.

So on the vManager side, is that becoming material revenue at this point?

I guess where would you kind of scope that in the mix?

I would be disappointed if it wasn’t material in the next two quarters.

I think at this point it’s tens of licenses that we’ve sold.

You can sort of make your own judgment there as to is that material.

In my mind, when it gets to hundreds of licenses, then it becomes material.

Okay.

And one more question on the SpeXsim side.

At your last Analyst Day, you talked about sort of having, I guess for the first time, being able to have almost an economic pitch to your customers using the combined solution.

I am just curious.

Any progress on that?

Has the environment impacted that at all?

And how are customers reacting to sort of the combined technology and the price they have to pay for it?

Well, I think they are -- the fact that they are embarking on this evaluation, or these evaluations on numerous fronts, demonstrates the fact that they like it.

And they can see both the value in terms of the dollars, and in terms of functionality that it provides them.

And so I am quite pleased with that.

And this product delivery has been the smoothest we have seen in a long time, and required rallying all of the troops inside the Company, and all of the developers, to make it happen.

But it happened on schedule.

And we’re very pleased with what we’ve seen.

Dennis Wassung;

Okay.

A couple other quick ones.

You mentioned six of the top 20 semiconductor customers.

Now was this six of your top 20, or six of the top worldwide semiconductor manufactures had expansions with you?

Well, it’s -- you know, those aren’t very different, because we -- actually nearly all of the top 20 are our customers.

And I think the only exceptions were typically DRAM guys.

But I was referring to six of the top 20 semiconductor companies, world semiconductor companies in terms of revenue.

Okay.

And were those mostly expansions to existing Specman deals?

Or did you sort of include, I guess, legacy active customers in that mix as well?

Let me take a look at the ones we had here.

Most of them were expansion on the software side.

But there are two here where it was both on the software and on the hardware platform side.

So two of the six, it was in both areas.

Okay great.

And last quick question, Charlie, on the deferred revenue side, it was down a few million sequentially.

And you had a book to bill about one.

Just curious if you’re seeing any change, I guess notable change in payment terms, or, if I remember correctly, there was sort of a larger percentage of sort of paid all up front deals last quarter.

Any dynamics there we should note?

No.

It’s more related to the individual customers and their pay patterns.

So, by customer, and as Moshe mentioned we had a number of renewals that we expect in this period, their payment terms remain the same for them.

They didn’t change.

But they may be a little bit different than the customers that we had last quarter.

So in that respect, there’s change.

But customer-by-customer, they remain very much the same.

So there is really not a change in our view of things.

The customers that renewed this quarter tend to pay on an annual basis, as opposed to more than the one year at a time.

Okay.

And any 10% revenue bookings customers?

There were two 10% bookings customers in the quarter.

Okay great.

Thank you.

Tim Fox, Deutsche Bank.

Just two quick ones.

Moshe, maybe you could talk about the comment you made about the strength in the system segment.

Is this something that you’re seeing because of something Verisity is doing differently with your new product set?

Or is this the system segment itself outperforming maybe the semi segment?

And what is it within the systems world that’s driving them to your solutions?

Okay.

SO it’s really a combination of elements.

But I would say the largest component, I believe, is we had a similar, on the software side and on the hardware side, we had a similar customer base, but not an identical customer base.

And I would say that on the hardware platforms, there were a proportionately larger amount of systems customers than we had historically.

And I think that now, as they become our customers, we are actually seeing opportunities to sell both product offerings to them.

But they’re still predominantly buying the hardware.

And, in some cases, they’re starting to make some acquisitions of the software VPA products.

So I would say that that’s driving it.

In terms of the overall health of the two markets, it’s really tough to tell.

I think that systems companies are becoming a little bolder, relatively speaking, than they were in the past, as I look at what they’re doing.

But it’s not a very scientific measure there.

Okay.

And Charlie or Moshe, you hinted at in your prepared remarks a few times about investments in R&D, and possibly even in the field with some AEs.

Your expense growth is just a couple percentage points below revenue growth for the next quarter.

I am wondering, without giving specific guidance obviously, as you move into ’05, do you expect that delta to grow as we move through the year?

Or do you envision continuing to have to pour investment back into the infrastructure?

Well, we’re going to make the investment.

But I would expect that gap to grow, and see leverage on the incremental revenue.

Okay.

So probably fairly early in ’05?

Well, it gets back to finding the right people at the right time.

It wouldn’t be as dramatic as if we had found the right -- some of the right people in the third quarter, as we had planned.

So there’s a little bit of catch-up there.

And it might impact the relationship in a quarter or two.

But we have certain specific investments we want to make.

And we’ll go ahead and make that.

But certainly that will certainly deleverage with the growing revenue in the not-too-distant future.

And we do have, I think -- have demonstrated in our steady state model, when you take out the purchase accounting, that get very good leverage on our models.

So I would expect that to continue, once we get past the additional investments here.

Okay.

Good.

Actually, and one more follow-up, if I could, on the question around deal structure and so on.

You had mentioned, I think, earlier on that you’ve seen some customers extend their agreements to multi-year purchases, and actually increase the number of seats.

Are you seeing any pressure on ASPs around that, if they start to extend the length of these contracts?

How are ASPs holding up?

Well, generally speaking, these deals weren’t necessarily extensions.

In some cases, or most of the cases, I would say it’s our existing customers in the framework of an existing two or three year deal, coming back and purchasing significantly more technology within the timeframe of that deal.

And I would say that that was what characterized Q3.

There were some extensions.

But it was more of the flavor that I just mentioned.

It’s expansion of existing deals, rather than extensions of deals.

And I think Q4 will be somewhat different in, and 2005 actually should be different, in that there is a lot of new deals or extensions that will happen in 2005.

Yeah.

Just to give you sort of an example, it’s been a couple of years now that the customers have wanted to go to multi-year deals, three year being the typical one.

But, as we said, the customers really find the need.

And we can show them the value when they’re going to a new project.

So we don’t try and sell them all the licenses they’re going to need for a three year period.

The typical model is to try and sell them what they had a need for in the coming year, and giving them some up side for maybe a year and a half to two years out there in the three year agreement, knowing that they will likely have to renegotiate.

And what we saw for a while when we were doing that is on average they come back in about a year and a half, and find the need for more licenses.

And what we saw, at least in the third quarter here with some of the key customers that have the third quarter renewal sort of, or anniversary of deals, is that they were finding a need for licenses even sooner, even as close to 12-15 months, and growing the license count, and in some cases extending the deal, and in some cases keeping it the same term, but just deploying licenses, buying more licenses, and deploying -- or deploying licenses sooner.

So that’s a good sign for us.

And not inconsistent with what we’ve seen before, except the license demand out there seems to be pretty vibrant, at least with the strategic accounts.

(CALLER INSTRUCTIONS).

Sterling Auty with J.P. Morgan.

Unfortunately, I had to jump on and off.

So I may make you repeat one item.

First, housekeeping.

What was the employee headcount at the end of the quarter?

It was just under 300.

Okay.

And then what’s the plan as you look here to the fourth quarter?

I thought I heard some investment as you move forward.

Where do you think head count grows to?

We could probably think of it being a successful recruiting quarter if we could add about 15 to that total over the course of the quarter.

We’ve added several too.

And I’d made that comment earlier.

It was relatively flattish in the third quarter.

But October has been a very good recruiting month.

We had several good candidates in the pipeline, going out of the quarter.

And they joined the Company.

And we are pretty optimistic about hitting at least a double digit increase there.

Okay.

And then did you say specifically was the book to bill over one?

Yes.

Okay.

And then last question is, with the issues that Synopsis has had, have you found that you’ve been able to kind of step in and pick up some additional market share?

Well, I think we’re -- I don’t know if it’s driven by their issues.

I think it’s driven by their technology versus our technology.

And it always has been.

And we’re the leaders.

We have the best technology.

We have the broadest portfolio.

And we’re, through the acquisition, we believe we now have a complete, unmatched front-end capability.

And we intend to continue to exploit that, and address a much, much larger market than we have.

The competition is as fierce as it always was.

And I don’t expect that to abate in the foreseeable future.

Okay.

Thank you.

(CALLER INSTRUCTIONS).

And there appears to be no further questions at this time.

Mr. Alvarez, I would turn the conference back over to you for any additional or closing remarks.

Actually it’s Moshe who will give the final wrap-up here.

I would like to emphasize that I am actually thrilled with the large opportunities that we have ahead of us, and am convinced now more than ever that we have assembled the right product portfolio to address them.

The traction of our new product adoption will continue to fuel the growth of our business, and enable us to attack what we believe is a $1b market opportunity in 2006.

We very much appreciate your interest in Verisity’s business, look forward to talking to you again at the Q4 earnings conference call.

Thank you.