新思科技 (SNPS) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Synopsys conference call regarding its third quarter fiscal year 2002 earnings. At this time all participants are in a listen only mode, and later we will conduct a question-and-answer session and instructions will be given at that time. If you should require assistance during the call, please press zero followed by star.

Today's call is scheduled to last one hour. Five minutes prior to the end of the call, I will alert the conference of the time remaining and as a reminder, today's conference is being recorded.

During the course of this conference call Synopsys may make predictions, estimates and other forward-looking statements regarding the company. While these statements represent the best current judgment of the company's future performance, the company's actual performance is subject to significant results and uncertainties that could cause actual results to differ materially from those that may be projected.

In addition to any risks that may be highlighted during the conference call, important factors that could cause the company's actual results to differ materially from those that may be projected in this conference call are described in the most recent 10-K, 10-Q, S-3 and 8-K reports of Synopsys on file with the Securities and Exchange Commission. At this time I would like to turn the conference over to chairman and Chief Executive Officer, Aart deGeus. Please go ahead, sir.

Thank you, operator. This is Aart deGeus, and I have with me Brad Henske, our CFO. Let me first welcome all of you to Synopsys fiscal third quarter conference call. I'll start by reviewing our performance by the quarter, then I will provide an update on the excellent progress we have made toward integrating the Avant! acquisition. As usual, Brad will provide financial results, and we will finish up with guidance for the coming quarter.

Overall, I'm very proud of the team's performance in delivering strong results. This is especially rewarding given the challenging times that our customers are facing around the world. Earlier this year many hoped that a recovery was near. It now appears that the electronics industry cannot predict that recovery anytime soon.

Indeed, during just the last 90 days many firms have again revised expectations downward for semiconductor R and D growth. Unfortunately, even these forecasts are not reliable as customers report zero visibility and are updating their business outlook on a rolling 90-day basis.

Consequently, continued uncertainty has further tightened customers' budgets. They have become very selective in what they buy and whom they buy from. Many of them are actively paring down the number of their EDA suppliers.

As we stated in the past, in times like this the largest and more consistent providers of good technology quietly gain market share. As a result notwithstanding the overall business challenges compared to others in the industry, Synopsys is actually benefitting from these trends.

Supporting this perspective are our Q3 results. I'm pleased to report that Synopsys had a strong quarter. Revenue of $236 was well on target and earnings before good will and merger related expenses per share of 53 cents was at the top of our guidance range.

From a geographic standpoint, North America required hard work, Japan remained very weak, Europe was solid, and Asia Pac had its second consecutive quarter of strong results. Asia Pac appears to be on a growth trajectory rivaling Europe for second place of the percentage of our business.

Even with strong results from Q3 in hand, though, given the business environment, visibility into future orders and revenue appears murky at best. However, our strong rateable business model will stand up in good stead, and we remain committed to our profitability targets for both fiscal '02 and '03.

Although it is unclear how fast R and D or EDA budgets will grow in the coming year, customers still perceive EDA as a high priority when compared to other expenditures. The reason for that is that technology development continues unabated. Consequently, the design, verification and physical problems that arise from new, more complex chip design require a more capable set of integrated software solutions. This all bodes well for Synopsys, as we have always shown strong technical innovation and an ability to deliver high-quality software and industry support.

There are four primary reasons why I believe Synopsys is positioned better than ever to take advantage of the business and technology changes going on within our end market. First, our updated product portfolio makes Synopsys the premiere full line supplier for IT design. Most of our products are best in class and are being used on the most advanced chips today.

Specifically, on the affiliation [phonetic] side, Design Compiler, Physical Compiler, Astro, Star RC, and Primetime are the increment [phonetic] points of leading edge chip design flow. Well over 90 percent of all digital chips designed today contain one or more of these tools in their design flow. Not surprisingly, these products will be cornerstones of the Synopsys family going forward.

We already have the strongest IT designs solution in the industry of EDA and as these tools are integrated further, it becomes even more compelling. In particular, we would like to highlight the great sales opportunity that we have with Astro. Astro is the next generation place in route system which went into production a few months ago. It is already shaping up to be the best back end solution for 19 nanometer [phonetic] leading edge chip design.

Existing Apollo customers have expressed excitement about upgrading to Astro, and new customers are eager to evaluate it as soon as possible. The growing demand for Astro and the rest of our back end product family is evident. In Q3 alone, two of our largest orders came from customers that renewed and significantly upgraded their back end tool deployments with Synopsys.

The second reason we're better than ever is that our R and D sales and support organization have consistently proven that they can deliver the goods, especially at a time when both technical and economical stress, fancy PowerPoint presentations mean nothing if customers can't count on a vendor's ability to deliver real world-class products. Clearly, for many customers, we are the vendor they count on.

Third, customers want to consolidate the number of vendors they work with. Though it greatly helps to be the vendor with a strong broad based product portfolio. In addition, with EDA tools becoming more strategic in nature, customers need lasting partnerships with vendors that are viable over the long term.

In a recent independent survey of chip designers by [inaudible] and ISD, Synopsys ranked number one in all top categories ranging from best support to best integration with other vendors' tools to best technology today, best technology in three years and vision of the future. We're happy to supply any of you with a happy of this comprehensive survey.

Last week given our long-standing install base and our relationship with customers, our broad portfolio offers crucial technology combined with the low risk of dealing with a trusted partner who has a proven track record.

Let me move on to the Avant! integration. The combination of Synopsys and Avant!, what we internally call Synopsys 3, is well underway and tracking ahead of plan.

Let me share a few milestones to help you gauge our progress. On June 6 we closed the deal with Avant!. On June 7 we completed our field sales integration. Three days later on June 10th, we made our first public appearance as an unified company at the design automation conference. Within the first week of the merger, all of Avant! products and operations were migrated to the Synopsys infrastructure.

On June 25th we held a worldwide sales meeting with the entire sales force. We kicked off integrated teams and sales strategies for the combined company. By June 30th all the product groups organizations were sorted out and the management structure was in place. We're happy that a number of key Avant! leaders joined our executive ranks.

Finally in the last several weeks we have previewed product roadmaps to customers. These milestones are the result of a well-executed merger.

Yet at the end of the day, the jury is out on a merger until customers have voted and voted with their business. As evidenced by the strong performance of our back end tools, the combined company is selling the full product line and with the early vote in, customers have started to indeed vote with the business.

In the process of merging, we confirmed the strength of several technologies in the former Avant! product lineup aside from the obvious [inaudible] and database products. Those include Star RC for extraction [inaudible] and optimal proximity correction technology and H Spy [phonetic] for analog and mixed signal verification. With the addition of the Avant! tools, Synopsys is now the market share leader in mixed signal verification, an area that holds great promise in sophisticated efficacy and design.

On the R and D side we retained the large majority of key development talent. We've had only 14 undesired departures out of roughly 600 Avant! engineers and we are very excited about the quality and the drive of the newly integrated team. After integration of the technology, as I mentioned earlier, we are currently delivering on that promise to our customers.

A few highlights from the roadmap I can share with you today including the following. The Milky Way database is a key access around which we will integrate our full line of implement tools. Physical Compiler and Astro will be the cornerstones of our [inaudible] solution for 19 nanometer [phonetic] design. Star [inaudible] will merge with nanosim [phonetic] on a nanosim [phonetic] based platform. Design verifier will merge with formality on a formality base platform. VCS will succeed Polaris [phonetic].

We are sharing more extensive details of our product road map with customers under NDA [phonetic]. Many have already voiced their desire to be active partners of the evolved, diverged products.

One of the ways that Synopsys has historically been successful is to proactively open our interfaces and to lead, drive, and support practical industry standards. We plan to continue that philosophy. Since Milky Way is the most advanced [inaudible] database in IT design today, we see great potential benefits to our customers and our industry in appropriately opening access to it. We are reviewing the technical and business implications to execute on this opportunity.

Further demonstrating our commitment to open standards, we have pledged our support to system Varilux, the next generation RTL language. To accelerate the pace, we recently donated a number of technical features to the open Varilux standard.

On the new product front we announced VCS7.0 which we have termed smart verification. VCS7.0 for the first time combines simulation, test bench creation and coverage analysis all in one platform.

At a design observation conference, we also introduced Floor Plan compiler, a welcome addition to our flow. In the IT and systems area, we announced our desire to acquire inSilicon. InSilicon brings a significant collection of valuable IT blocks to be sold on a pay per use basis. InSilicon will also contribute to our analog expertise.

As we announced this morning, the Hart-Scott-Rodino Waiting Period has expired, and we expect to close the transaction during the quarter.

As you can see, there's a lot of momentum in our business right now. We plan to share our updated product vision with all of you at our analyst and investor meeting which will be scheduled for October in New York. We hope to see many of you there.

Given our broad product portfolio we've also decided to recategorize our revenue product breakdown. Our five new categories consist of design implementation, which is roughly 45 percent of our business, verification and test at roughly 26 percent of our business, design analysis with roughly 17 percent of our business, IT at about 6 percent of our business, and consulting services and other at about 6 percent of our business as well. Details of the contents of each of these categories are available on our website.

In summary, Synopsys had a strong quarter against a tough economic backdrop that provides little future visibility. We're making excellent progress with the integration of Avant! and are presently engaging customers on our product roadmap. Synopsys now offers the most complete IT design solution and we expect to gain market share going forward. Notwithstanding the uncertain market environment, we are committed to manage the company towards significant profitability growth in '03.

With that, let me turn it over to Brad for more detailed breakdown of the financial results and guidance.

Thanks, Aart. Q3 2002 was a good quarter for Synopsys, even amidst all the activities around the close of the Avant! acquisition and despite the difficult and deteriorated environment. Our revenues came in at our target range, the expenses were below target, and earnings before good will per share was 53 cents at the top of our target range. Orders met our expectations.

As a reminder, earnings before good will or EBG represents earnings on a diluted basis, excluding amortization of intangible assets, integration expenses, end process R and D as the basis for this financial presentation.

The semiconductor market continues to be very weak. As I will discuss later, most of our customers have little to no visibility. The volatility of decision-making and timing of tool purchases when there are customers continues which makes transacting business unpredictable and difficult.

In this environment, the strength of Synopsys new full product line and the depths with our long-term relationships with our customers have stood us in good stead. Customers are focusing on their critical needs and [inaudible] their purchases with design partners they trust will help them be the most successful over the next few years. We value being chosen as such a critical partner and expect to become more so in the future.

Let me now turn to Q3 results. Total revenue for the quarter was $236 million. Our total revenue grew 34 percent versus the same quarter last year, while total software revenue including maintenance grew 41 percent. The difference was driven by lower performance in our consulting and training businesses. Rateable license revenue was $102 million for the quarter or 63 percent of software product revenue. The substantial growth from Q2 was driven by the strong subscription orders in Q2 and the addition of the Avant! backlog. Our consulting and training business are remaining stable, although running at a very low level.

For the quarter 68 percent of our software product bookings were rateable licenses. The average [inaudible] of TSLs booked in Q3 was 2.9 years. We booked 32 percent of our software orders and licenses with revenue was or will be recognized at the time of shipment, not essentially perpetual.

This is slightly above our target range for the quarter, primarily due to the fact there were several orders totalling more than $20 million that were booked but could not be shipped in the quarter. They have been or will be shipped in Q4. Excluding those orders, perpetuals [phonetic] were 24 percent of software bookings, below our expectations range.

Services revenue totalled $74 million up from the prior quarter due to the impact of combining the two companies. Service revenue is down when compared to the same quarter last year driven by the natural of old maintenance to TSLs, lower levels of maintenance renewals as customers try to cut corners by trying to get by without support and the decline in consulting and training.

Our aggregate EBG operating expenses including positive goods were $186.9 million, which was below our target range for the quarter. EBG operating earnings were $49.2 million, up from $5.9 million the same quarter a year before. Our operating margin was 21 percent. As we said before we expect to exit the year around 30 percent.

Other income was $11.4 million inclusive of full writedowns in our venture portfolio. Earnings before goodwill and other merger-related charges amounted to 53 cents per share at the top of our guidance range and up 89 percent in the same quarter last year. Diluted share comp was 74.98 million shares, which reflects the partial quarter of shares issued in the Avant! transaction.

Similar to what we had described on the call at closing, integration costs were $117 million in the quarter, including $95 million for our litigation insurance policy, approximately $15 million for the writedown of surplus and office facilities, and approximately $7 million for various other integration activities.

In addition $110 million of merger costs, including $63 million per facilities closures, $10 million for severance and personnel related charges, $26 million for professional fees and $11 million for other deal related expenses, primarily the restructuring of distributor contracts were included in the total purchase price of Avant!.

EBG operating cash flow for the quarter was $69 million, excluding merger related payments. We generally expected higher cash collections in the quarter from business booked in the quarter; however, one of the manifestations of the stress in our customers is the greater desire to pay over time particularly for subscription licenses. Since the middle of last year to this prior quarter, the percentage of cash scheduled to be collected within 60 days of when the order was booked has moved from approximately 65 percent to approximately 22 percent. The percentage of cash scheduled to be collected within one year has moved to approximately 88 percent to approximately 66 percent. So while we've locked in this quarter, we have locked in greater cash flows in future quarter.

The total of our future committed noncancellable customer payments are currently contracted was well in excess of a billion dollars at the end of Q3. Despite lower payments and the large expenditures associated with the close of the Avant! deal, cash and short-term investments continue to be strong, with our Q3 balance sheet ending at $446 million or $5.95 per fully diluted share.

Q3 accounts receivable totalled $233 million. For the quarter, DSO was 86 days, up slightly primarily due to the inclusion of the Avant! receivables. Deferred revenue at the end of the quarter was $443 million, up 77 percent from the same quarter a year ago and up $46 million or 12 percent from the previous quarter. $7 million was from organic growth in the quarter and $39 million from the inclusion of the Avant! deferred.

During the quarter we repurchased approximately 830,000 shares for $42 million at an average price of approximately $50 a share. $440 million of the $500 million authorized program remains open at this time. We will continue this program for the coming quarter as long as prices remain attractive.

In addition, we currently plan to implement a 10-B5 program to repurchase shares during periods when otherwise the windows would be closed. Head count totalled 4,177 employees for the quarter up 1,121 from the prior quarter reflecting the merger of Avant!. We eliminated 222 head count as part of our integration efforts.

Finally, I would like to describe our expectations for the future. As I mentioned earlier, visibility has markedly continued to deteriorate in the last quarter in the semiconductor industry. Even the optimists have given up much hope into seeing into next year. The consensus we hear it's very unlikely there will be a significant upturn in the next couple of quarters, and after that visibility disappears into the fog bank.

For our business visibility becomes difficult more than one quarter out as our customers are reevaluating spending on a quarterly basis. As a result we feel comfortable giving detailed guidance for only the next quarter. For Q4, we expect revenue of $305 to $312 million, total expenses of $210 to $215 million, other income and expense of $3 to $6 million, outstanding shares of $74 to $78 million, a tax rate of 33.5 percent, and earnings before good will of 85 to 90 cents a share. And perpetuals between 20 and 25 percent of product orders.

Therefore, for the full 2002 fiscal year, we expect revenue of $903 to $910 million, total expenses of $720 to $725 million, other [inaudible] of $37 to $40 million including approximately $22 million of investment sales gains, outstanding average shares of $71 to $75 million, a tax rate of 32.5 and earnings before good will of $2.04 to $2.09.

On the our last call we said the most outside estimates at that time expected semiconductor revenue would grow in the mid teens in 2003 and that R and D spending would grow in the mid single digits. Today we simply don't view those estimates as reliable. We are comfortable that we can manage the business to generate $3.35 in earnings per share next year, and we plan to do so. However, we have decided to withdraw revenue guidance on our commentary on orders for next year.

However, if Q4 goes as planned, we will enter 2003 with approximately $750 million in 2003 revenue already booked into deferred revenue and backlog. We plan to hold our expenses at the Q4 2002 run rate, although we will make a number of internal adjustments.

Our orders mix, as we said before, will be approximately 22 to 27 percent perpetual license we expect the duration of subscriptions will be roughly three to three and a quarter years and in 2003 we continue to expect that our reported revenue will be made up of approximately 15 to 20 percent product, 50 to 55 percent subscription, and 25 to 30 percent services revenue.

Thank you for your attention. Our operator will now open 00:00:00 the questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the one on your touch tone phone. You will hear a tone indicating you have been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the number one. One moment, please, for the first question.

The first question comes from Greg Wagenhoffer, CSFB. Please go ahead.

I didn't hear you, and maybe I missed it. Did you talk about at least in the past you've talked about a five percent order growth for fiscal '02. With one quarter to go is that still alive or is it kind of [inaudible] maybe closer to zero, can you add some color there?

I think it remains yet to be seen, but it's somewhere in that broad range.

Okay. And also given that you did take away the $1.3 million guidance for next year but kept the three and a quarter EPS do you have an operating cash flow number you can share with us behind the EPS number?

We're not at the moment giving cash flow guidance for next year, although we're thinking about some constructive way to do that.

And one last question for you. I know you said there were, I think, two large upgrades and the Avant! back end upgrades. Were there any competitive displacements that you can talk about during the quarter?

No, I think those have just now started because in many ways we took over the Avant! products two months ago. It took us about one month to get the whole field aligned, which I think is very rapid, and now we're absolutely engaged in a lot of situations where there's opportunity to displace or to just upgrade out of the existing base. And so the general feedback we're getting is actually it's looking very strong and getting stronger by the day as its been rolled out of production a couple of months ago. And our biggest challenge, frankly, is going to be can we have enough support engineers in place to work on all the potential engagement.

Great. Thanks.

You're welcome.

And we have a question from Jennifer Jordan with Wells Fargo Securities. Please go ahead.

Yes, good afternoon, Aart and Brad. Brad, could you just give again the numbers for the expectations for reported revenue next year? I missed part of that line. 15 to 20 percent perpetual, then -

Sure. It was 15 to 20 percent product, which was perpetuals, 50 to 55 percent subscriptions, and 25 to 30 percent for services.

Gotcha.

As usual, we put these scripts and all the numbers up on the website.

And I was wondering if you could address a little bit product development strategy and the way that the design teams ended up structured. Art, you talked about the integration of your R and D aspect. Did you end up putting the Synopsys people kind of in charge of the Avant! people or vice versa in the products that came from Avant!?

We actually did neither. We in many situations merged the team, and in a number of situations the Avant! existing managers took over, and some situations it was the Synopsys team. We were very both conscious but also experienced in knowing that in order go to the next generation products, whenever you have competing products you want to merge the team as quickly as possible so you don't get into any situation where one product would be advocated over another.

We want the customers to tell us which is the best selection from a functionality point of view and we want the R and D guys to look at that time truly what is the best platform to build on. We have taken the same approach when we were [inaudible] logic and that paid handsome dividends, and I think we are very well on track, I would say, on executing here as well.

One last question. When you look at the types of products that customers are buying right now are there any particular areas within your flow that showed more strength during the quarter due to sort of people buying as needed strategy here?

Well, I think in general it's fair to say that the back end tools were very strong this quarter. I think partially also the sheer fact that we picked those up and they got a lot of attention helped. But I think it is probably reasonable to assume that customers are really buying just what they need today and so wherever they have a problem, that's where they're going to spend the money, and back end tools has been one of the areas.

Thank you.

You're welcome.

And we have a question from Garo Toomajanian with RBC Capital. Please go ahead.

Hi, a few questions for you guys. I'm curious about the maintenance levels. I know in the past customers have been looking at dropping maintenance as a way to save costs. I'm wondering if any customers have started to come back on or if the trend here is to still try to stay off.

I mean, every quarter there's some customers that come back on, even in this environment. I would say the trend is probably a little bit still to the off side.

How much of the services number is actually maintenance?

Everything not including consulting, I'll figure it out for you. Why don't we come back to that.

On the inSilicon side, I think you mentioned that you're looking to sell that IP basically on a per use basis which is different from the way you sell most of the designware products. I'm wondering as some of these inSilicon products age whether they might be included in designware subscription or what the long-term strategy might be there.

I think you just described very correctly what we are looking at doing, which is that when you have a broad portfolio of IP, a significant portion will be in designware which you essentially buy on a yearly subscription basis and then you can freely use and then there will be a portion of IP, typically the more sophisticated IP, that will be sold on a per use basis, meaning that or the customer buys, pays every time they use it on a chip. And so you're correct in assuming that as IP ages it will tend to automatically enter the designware bucket over time while we meanwhile replenish the top end.

Great.

Garo, maintenance and updates were about 60 of the $73 million in the service category this quarter.

Okay. And lastly, I think you mentioned that 222 people had been cut through integration, 14 of which were undesired. Can you talk a little bit about what that undesired component came from and where they were and if there was an impact there, and also I think I remember a number of around 350 targeted as a total for head count cuts. Is that still true? Are there still some cuts to be made?

Yes, 222 was the people with desired turnovers, people that we riffed [phonetic], so it didn't include the 14. There are still a number of people in the company, primarily in operations areas put on specific transition programs. Most of those will end this quarter.

You know, when we look at transitions like this, we always try to classify a little bit what is proactive management versus what is undesired, and there's no question that any person that leaves that we'd rather retain we would have rather retained that person.

The good news is we have a tremendous amount of bench strength, and it was easy to see how quickly we were able to backfill the few positions that were important; and in general it's also interesting to observe that the percentage of R and D within Synopsys overall has now gone up significantly. So that will make, I think, a very strong technology company.

Okay. Thanks very much.

You're welcome.

And we have a question from Tim Klein with US Bancorp. Please go ahead.

Yes. Could you give some color on the specific sectors, you know, in terms of consumer PC and the like and what you saw in the quarter in terms of, you know, we've seen some of the weakness in some of the consumer electronics retailers, for instance. How does that correlate to any changes you've seen in the specific sector as being end markets being served by your customers?

You know, this is the question that comes back every quarter because everybody is trying to read the tea leaves as to what's happening, and I must say from what I hear the landscape overall has not changed much in terms of nature. It is still somewhat surprising that the consumer segment is the one those holding on strongly for most of the semiconductor guys. They also mention storage every so often and some of the local area networks. But you know, the big downfalls remain in networking and communications, of course.

And the big issue there is there has not been any major league driver like we've seen in the last 15 beers, PC or wireless or networking and UMTF [phonetic] which was hoped for is definitely delayed massively or totally put in question.

Having said that, if you look at it from a geography perspective, there's no question that Asia Pacific is doing well and growing rapidly. We see a lot of investments there. It's still a fairly small base. The level of activities in countries such as China, Taiwan, and now also Korea is definitely up.

Okay. Good. I don't know if you have this with you or maybe we can get it later, but on the revenue per product family, would it be possible to get a pro forma breakout for those since you don't have the detail for the Avant! piece to understand the kind of true line item comparison historically.

We sort of debated this and came down on the side that we'd rather not do that for a couple of reasons, which is we have very rapidly and forcefully integrated the product line and actually believe that the buckets are well chosen to reflect also where technology is going to have going forward. And so pretty soon it becomes not very meaningful to look at the origin of the products are but it becomes very helpful to see how the buckets are doing because they will really represent major design tasks that belong together. So I can appreciate why you would like to on one hand have that look, and the other hand it's an enormous amount of work and we've decided internally to focus strictly forward.

The last question has to do - there's been a lot of discussion about the success with .13 chips on the manufacturing side, but can you talk a little bit about what you're seeing from your customers in terms of their appetite or their design activities that process geometry and where you're seeing them focus their efforts, is this any change there.

Sure. Notwithstanding the fact that many people like to see these different geometries of big discount annuities, the reality is we see very gradual progress. And when I talk to semiconductor execs, it's interesting to observe how often the word ".13" and the word "problem" occur in the same sentence. And that is now becoming very visible because a number of chips that have been fabricated have come back, a number of them have physical problems, many of which, by the way, could easily have been diagnosed with our products. And so the level of attention to doing better back end design is definitely rising, which is clearly good for us.

And so what I expect will continue is that all of the advance design today is on .13. There are a few hardy souls that are toying with .09, but this is at the limit is just experimental, and we have a lot of work and opportunity on .13 and the bringing together of the two product portfolios between Synopsys and Avant! is extremely timely for exactly that wave.

Thank you.

You're welcome.

And we have a question from Bill Frerichs of D.A. Davidson and Company. Please go ahead.

Bill?

Excuse me. I have a couple of questions first. I believe, is it correct that you were sticking to the Avant! nomenclature for the products and they won't be renamed some other name unless there's a totally new release?

Well, let me put it like this. As we gradually - you put it right. When there's a totally new release there's an opportunity to rename. There's always the temptation to rename, and then what you quickly find is that the new product is then referred to with the new name plus the explanation of what the old name was, and so in practice it's not so easy to move these things. I think we will essentially do a gradual transition to a more integrated naming scheme, but probably just as yourself we are still learn how to deal with many planets here.

Okay. I've known for a while. Among the 14 of 600 people who left, I was wondering if there were R and D engineers who were focused on a particular area that might cause you a problem.

No, actually it has been pretty broad. Pretty distributed, actually, over the R and D team, so we clearly carefully looked at this because we tracked from day one key people, and the bottom line is we don't see any issues going forward.

And finally just out of curiosity, are there collection issues in the Avant! receivables and that you have taken any extraordinary measures to deal with?

So Avant! was generally issuing modestly more credit terms than Synopsys did historically, but we don't have any collection issues that are material to the company on either side.

Okay. Great. Thanks a lot.

You're welcome.

And we have a question from Raj Seth With SG Cowen. Please go ahead.

Hi, thanks. Aart, I wonder if you can talk about the competitive behavior you're seeing in this very tough environment, specifically what are you seeing with regard to some pricing out there?

Well, you know, one would immediately jump to the conclusion that when a customer is trying to cut down their expenses that they are going to drive harder on discounting. The answer is that's not really what we're seeing. I think that's in the present landscape customers are much more diligent at looking at what they really need and buying what they really need and not buying the rest and also buying only as much as they need today.

And so that is helpful to us because we tend to be at the top of their shopping list. And with the - with the Avant! merger, in many ways we help directly in reducing the number of suppliers that they will have, consolidate from their perspective their purchasing power, which they will clearly try to use on the discounting side, but they will also use with us to reduce risk and broaden our exposure to their problems and our helping them solve those problems. So far I think it's been very good for us.

We have heard of a number of smaller companies trying to now push their products at extremely low prices just to sort of get in, but the bottom line is this has not affected our business. Fair to say that in general with our customers, you know, the finance department rules. And you have heard from many companies that at the end of the quarter decisions may fall in or out. That's because finance departments can say no on a whim, and one needs to really work well with them.

How long do you think it's going to take before the mini evaluation that you talked about before result in decisions on the next generation backbone for digital design? How long is that going to take?

I think there are companies that right now are already making positive decisions towards that. They have seen that we have the technology, they've seen that the initial direction is going in the right fashion, and so they are making the decision even without knowing all the details, largely based on the trust of past behavior.

There are other companies that are saying, well, you know, because of the economic landscape we can take our time, but let's get involved right now with Synopsys in helping guide in the right direction and potentially look at this a little bit attached to inSilicon nodes or essentially attach it to the next chip cycle.

In this regard you don't sound very different from what Cadence, and I guess I'm wondering if we'll get to a point in the near future where these customers that are making these decisions will stand up and say we're standardizing on the either Cadence or Synopsys or if this continues to be an environment where it's sort of a multivendor environment where it's very difficult to discern what the primary tool set is.

Well, we will continue to strongly support with our tools the Cadence environments because we have a significant number of customers that have traditionally used some of Cadence's back end tools. At the same time there's no question that we will strongly drive a solution that is very much Synopsys centric because of all the technology benefits of doing that.

And it's clear for many customers that have had Synopsys and Avant! in the past this has all been gravy moving in the right direction, so to speak, mixing metaphors a little bit. So I think we're very, very engaged with a lot of customers that are suddenly giving a lot more attention to where we're heading and I do believe we will emerge as the strong leader in IT design.

One quick last one if I might. You mentioned the Astro opportunity. How many seats of Apollo are out there and over the next year or so, how many of those do you think you can upgrade and what's the ASP there?

While the team here is looking hard at seats, I don't know exactly a number. It is clear that we have well over 300 customers, and I think that we will upgrade a significant number as people move to their next chip.

All right. Thank you.

You're welcome.

And we have a question from Jay Vleeschhouwer with Merrill Lynch. Please go ahead.

Two questions, first for Brad. When you closed the merger on June 4th and had the conference call, you made some specific projections for two key points in the accounting treatment, one being the model change that is in terms of moving a Avant! more towards your model and the so-called backlog recognition effect. You made a specific forecast for each of those. So now that the quarter is closed, what did these effects actually turn out to be?

The second, and by the way, also in terms of the future effects for the rest of this year and next, have you had to alter what those effects might be, given that this is presumably a lower booking forecast.

Second for Aart, in terms of customer buying as it relates to technology, at DAC you described, or Senji [phonetic] you described four different types of design flow, and I'm wondering about what you're seeing in terms of the relative demand in each of those four types of demand flow and if you're seeing that these shifts toward the more complex versions that you had talked about.

Jay, with regards to backlog and deferred, the numbers are more or less coming out in the ranges we talked about.

If we look at the design flows, fundamentally there were two dimensions to that, just to remind people, there were the hierarchical versus flat and then there was the simple versus high performance.

There should be no doubt that Synopsys drives its mode of thinking from the perspective of hierarchical performance and in that is going to be the first long-term decision criteria that customers are using because those are with us know it already, those would like to become more of a Synopsys customer want to be assured that that is where things are going.

If we look at the other categories, the nice position that we're in is that much of that works already today because a lot of customers have had both design environments in an independent fashion, and what we're seeing is that the initial feedback from customers is that they are happy to see that we will do some quick integrations and they're also happy to see that there is a strong roadmap towards to driving the state of the art.

So I would expect that we'll continue to see design compile Astro be one of the capability that is will work well. PC Astro is clearly the backbone for the high performance hierarchical flow.

Brad, let's go back to your response. Is there any change in the estimated effects of those accounting treatments from the merger. And on Aart on the technology side, can you talk about your current expectations from going to general release from either Route Compiler or Floor Compiler?

So I guess with respect to the backlog, no, I think they're in rough with the same zip code. These things are pretty much fixed at the starting point and similarly, the maps around the license and exchange.

Okay. And Aart?

To be honest, I did not understand your second question.

You had talked at DAC [phonetic] on other occasions about when you would go to general availability of both Route [phonetic] Compiler and Floorplan Compilers. You said both are still in the evaluation phase. So when do you expect to make them widely commercially variable?

Floorplan Compiler was introduced at DAC, and it's going into full customership in September. Route compiler is a more complex story because there, of course, we have now many of the Avant! technologies and so the pathway that we're take there is to work with all the customers at that are engaged with Route Compiler because it has some very, very unique features and the assumption has to be that will all be merged in the PC Astro type combination.

Operator, any more questions?

Yes, we have one from Jeff Macy with Needham and Company.

Thanks. Most of my questions have been answered, but I was wondering if maybe you'd comment a little bit more about if you're seeing any unusual competition in any, you know, specific product areas or if it's, you know, pretty much par for the course?

No, I think actually it is not unusual at all. I think what is unusual is the landscape around us in terms of how careful customers are at looking at any acquisition and how controlled the spending environment is from the financial functions of companies.

What has changed for us, and that is actually a big change that we are quite conscious of and still reflecting in our customers, is that having now a complete solution puts us, I do think, in a different league than where we were before at a time where customers would like to have very strong relationships to reduce the risk.

A lot of customers see the world right now as very risky from both a technology and a financial point of view, and so being able to bank on an EDA partner they have trust is important and being able to do that while knowing that EDA partner has a complete solution is very helpful in establishing the next level of rapport.

And can you comment a little bit more about how these evaluations are going with respect to Floorplan Compiler in general?

Well, the Floorplan Compiler was just rolled out. We have quite a number of evaluations. We already have a few very strong endorsements of people that have had big impact, SD and Media are good examples of that. It is a great addition because this is an area that we did avoid in the past, and so we are now essentially getting a lot of feedback from customers that will I think very rapidly evolve the product forward.

And just a couple of bookkeeping questions. What was the capital expenditures for the quarter and also the depreciation and amortization aspects?

Let's see. Capex for the quarter was a little over $9 million. I'll get you the depreciation later.

Great. Thanks a lot.

You're welcome.

And we have just five minutes left in the conference. We have a question from Arnab Chanda with Lehman Brothers. Please go ahead.

Thank you. If you would talk a little bit about the migration from synthesis to physical synthesis? If I'm looking at your design implementation right, it seems like that segment slowed down a little bit this quarter. If you could talk a little bit about what's happening in core synthesis and how the transition is going, how you're doing relatively to competition. Thank you.

I think it's fair to say the whole picture has changed dramatically because our complete flow is now much amended from where we were just three months ago. I think therefore the key statements are that we still see Physical Compiler as the cornerstone that really connects the traditional front end to the traditional back end. We will see a Physical Compiler now buddy up much more with Astro, because that's the piece we didn't have before. Obviously that was well connected with Design Compiler. We expect Design Compiler will continue to be a conduct that will find a lot of utilization in many situations that are not totally timing critical. So in that sense there's no real change from the trajectory that we were on before. I do think that we will need to reassess how we, I guess, market the very fact that we have now a complete solution which is a great, great opportunity for us.

Thank you.

You're welcome.

And our final question comes from Jennifer Jordan with Wells Fargo. Please go ahead.

Yes, just a couple of questions, Brad, could you remind us what your guidance was at the time for how much Avant! would flow through? I believe it was 70 to 80 percent of the subscription backlog for Avant! would flow through to the revenue line; is that right?

Yeah, what we said was 70 to 80 percent of the deferred end backlog. What that means as a practical matter is more of the backlog, less than the deferred. That's what we said.

Okay. And then - oh, for Aart, earlier in Avant!'s year they had given some guidance about the amount of Apollo they expected to have upgraded by the end of the year, and I believe that number was fairly high like 45 percent. I was wondering if you have a sense of where you are on that trajectory.

To be honest the answer is I don't have a good sense for it. 45 percent seems high to me. On the other hand, I can also say that the level of interest for Astro is very, very high. And so I don't have enough feel for it to be able to say are we in the ballpark or not. What is clear to me already is we want to add more application engineers in the field to support the many engagements. There's clearly a big opportunity here and therefore execution, execution, execution is really our target here.

So expect to add some head count in that area? How many?

The answer is yes. I'm not quite sure how many, and I think at any point in time we look at our product portfolio and then we move application engineers somewhat around to focus on those areas that have either the biggest need or the biggest opportunity, and this clearly falls in the latter category.

Is there any challenge in that the engineers you may have had doing applications were more front end oriented than back end oriented?

One of the big positives of really having answered the physical domain starting about two years ago with Physical Compiler is that - and I think we talked about it at that time, we were not just making some R and D move. We made a major move in investing in the physical expertise in our field, and I think that is paying handsome dividends right now because, A, we can train people quickly; and B we have quite a number of people employed. It is fair that the level of interest is surprisingly - maybe it shouldn't be surprising but it's very, very high.

Thank you.

Jeff, on your question earlier the depreciation was around $13 million.

Thank you.

And Mr. deGeus and Mr. Henske, please continue with your closing remarks.

At this point in time we would like to thank you for attending this conference call. We do believe we had a very strong Q3. We're looking at a landscape that has its challenges, but we're suddenly looking with a high degree of enthusiasm given the feedback we're getting from customers, and we're progressing extremely well, I think, with the integration of the merger. Thank you very much for participating. Thank you. Good-bye.

Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT and T Executive Teleconference. You may now disconnect.