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.