新思科技 (SNPS) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Synopsys First Quarter Fiscal 2003 Earnings Conference Call.

At this all participants are in a listen-only mode.

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 the "0" followed by the "*" key.

Today's call is scheduled to last one hour.

Five minutes prior to of the call, I will alert the Conference of the time remaining.

As a remainder, today's call is being recorded.

During the course of this call, Synopsys may make predictions, estimates, and other forward-looking statements regarding the Company.

While these statements represent the best current judgment about the Company's future performance, the Company's actual performance is subject to significant risks and uncertainties that could cause actual results to differ materially from those that maybe projected.

In additions to any risks that may be highlighted during this conference call, important factors that could cause the Company's actual rustles to differ materially from those that maybe projected in this conference call are described in the most recent 10-K, 10-Q, S-3, and 8-K reports of Synopsys and they are filed with Securities and Exchange Commission.

At this time, I would like to turn the conference over to Aart De Geus, Chairman and Chief Executive Officer.

Please go ahead sir.

Thank you operator, this is Aart De Geus, and I have with me Steve Shevick our CFO.

Welcome to Synopsys fiscal Q1 2003 conference call.

I will start by briefly reviewing our performance in the quarter, and then I will provide you with an update on our end markets, our industry, our platform initiatives, and our competitive position.

After that, Steve will cover our financial results in detail and give guidance for next quarter and for the year.

We will conclude with Q&A.

So starting with our results.

Fiscal Q103 was a good quarter for Synopsys.

Revenue of $268m was within our target range of $262-273m.

Earnings before goodwill were 68 cents per share, at the top of our target range of 63-68 cents.

Orders for the quarter were on plan.

What significant about our results is that in the midst of two years of massive market shifts, we have managed the Company with rigorous financial discipline and in the process we have quietly emerged as the strongest company in EDA.

Looking at the hi-tech and semiconductor markets that we sell to, I would love to be able to say that recovery is on it's way.

However, I must be clear on what is truly happening in end markets.

Virtually every semiconductor executive I have talked to lacks visibility beyond the present quarter.

The overall geopolitical climate hasn't helped build confidence either.

On a more positive note, semiconductor part quantities shipped increased substantially in 2002.

Recent indicators show that over capacity has gradually been consumed during the year and should bring about better pricing for summer.

In conclusion we all should be clear.

Well-managed companies focus on cost and risk management while still investing for the future as best as they can.

I am sorry operator it seems like we have somebody else on the line.

Let me continue.

Speaking on investing for the future, the cost and yield challenges of chip manufacturing at the smallest geometries has been surprisingly high, and here I am speaking of 130 nanometer and 90 nanometer devices.

To compound these challenges, the chip's complexity, which is measured in terms of the number of transistors in the design, has continued to grow unabated.

Designing a sophisticated chip requires a substantial set of design verification tools plus the skills to make them all work together.

As a result of all these factors, the average design NRE, or non-recurring engineering cost for a system-on-a-chip has arrived at roughly $10m.

In light of the economic stress and the technical challenges, our customers are actively trying to reduce both cost and risk in a few specific ways.

Some are teaming up among themselves to reduce the cost of the next silicon technology phase.

Some are shifting development and manufacturing to the lower cost centers in the Far East.

Many have decided to reduce the number of their suppliers.

This applies to EDA as well.

As we see customers seek fewer but closer relationships with those partners that can provide complete integrated solutions.

This trend is positive for Synopsys, because when customers look to reduce their number of suppliers they look to us.

We offer both the complete IC design solutions as well as individual products that are best in class.

For many customers, counting on Synopsys for their EDA needs is not only the lowest risk solution but is also the best path to aggressively solving the next set of technical design challenges.

In addition, our financial stability is a big plus in light of the consolidation in our markets.

Customers increasingly want to align themselves with vendors that will be around for the long haul.

To sum up my customer observations, 2003 is likely to be another very tough year for our customers, but Synopsys is well positioned at the top of their short shopping list.

Given this backdrop, what did we see in the four major geographical regions?

North America continued as our largest region.

We see the focus on cautious procurements continuing with customers purchasing "just in time" to minimum number of software copies they need.

With this increased emphasis on cash conservation, selling will remain challenging in the coming quarters.

In Q1, our East Coast results were significantly stronger than sales from the West Coast.

This is primarily explained by the demise of a number of West Coast products that could not attract any further rounds of financing.

While the high-tech market is still tough to medical, aerial, and transportation sectors in North America all are growing.

In Europe, while the economic field is about the same as in North America, we saw some signs of improvements.

In fact, Europe outperformed against our expectations.

The communications market is finally getting some traction with 2.5G Wireless and some initial deployment of 3G capability in Germany.

Japan's economy follows improvements.

Our business in that region is driven by the timing of renewals with large customers and therefore varies greatly from quarter-to-quarter.

From an applications perspective, apart from wireless, other interesting areas of growth appear to be in the automotives, handheld graphics, and plasma display, and LCD controllers.

Asia-Pac continues to outperform expectations.

Synopsys invested early in this region, which will continue to pay off for us as more and more customers grow chip design teams in India and China.

Let me now comment on the progress made in the Q1 for the product point of view.

Six months after closing the merger with Avanti, we started to roll out our integrated product platforms.

As we stated in the past, we have moved our company strategy to develop and support products based on two major platforms, the Galaxy Design Platform and our Verification Platform.

Before I give an update on our progress there, let me first define what customers are looking for in a platform.

Customers want a suite of key design tools connected to a common database using the same libraries, using consistent constraints and delay calculators, and providing comprehensive treatment for timing closure, signal integrity, testability, and power consumption including direct access mechanisms for third party tools.

This integrated suite of tool is a platform.

The success of the design platform first and foremost depends on the strength of its four anchor technologies, center phase, physical central phase, timing verification, and place and route.

No matter what the other benefits may be, customers invariably choose a platform based first on these anchor points.

That's great news for us, because with design compilers, physical compilers, PrimeTime, and Astro, Synopsys clearly has the strongest presence in the market.

In addition, we have a suite of other products ranging from floor planning to design for test, to physical verification, to math preparation, which beautifully rounds out the picture.

Finally, we have made extra efforts towards interoperability to connect well with some excellent complementary products from competitors.

This is all done with a single objective in mind to provide the best and lowest risk solution for IC designer of the market.

In Q1, we not only introduced the beta release of Galaxy, our design platform, but we also went a step further.

Two weeks ago, we opened up Milky Way, the underlying database.

We are making available APIs for application programming interfaces to enable customers to tightly integrate both their own technology and third party products into the design platform.

To interface well with other EDA vendors, be they partners or competitors, we have set up the Milky Way access program or MAPIN for short.

For example Mentor is already in the process of connecting Caliber, one of their most popular products to our solution.

We have seen great momentum with MAPIN and we view it as a key initiative to maintaining Synopsys position, as we prefer to design platform for customers.

To understand why we expect customers and partners to work closely with us, it helps to appreciate that a chip database is an extremely complex system of design data.

A single error among billions of pieces of data can easily ruin a $10m [inaudible] chip design effort.

For that reason alone, not withstanding other important criteria such as speed, capacity, and so on, the single, most important aspect of the database has to be proven robustness.

By three orders of magnitude, Milky Way has the advantage over any other alternative.

The database has been homed over many years with thousands of the most advanced design.

Now that it is open, it has immediately become the de facto standard for the industry.

The Galaxy platform build around the Milky Way database went to beta in late December.

The plan is to move to limited availability in the spring and to go to full customer shipments by the end of June.

Our Anchor point design tools will all be on the Milky Way database, using a common architecture from systems library and a common PrimeTime delay calculator throughout the flow.

Already, eight of the largest semiconductor companies have formally standardized one-hour delay calculation.

This is a tremendous engineering accomplishment given that the closure of the Avanti Merger was a mere seven months ago.

Let me now turn to Synopsys application platform.

In the last few years, the verification problem has been growing much more rapidly than more as well.

Not surprisingly, around the main stay of simulation, there has been a large number of investments at Synopsys as well as some startups to attempts to mitigate the problem.

Two years ago, it became clear to us that bringing together the most promising techniques in to an integrated verification platform was going to be essential for our customers.

In Q1, we shift the Anchor Point for this platform, VCS 7.0, which went into general availability.

With this release, VCS is not just a simulator anymore.

It now includes technology-enabling assertion driven application, test bench automation, and both functional and observed coverage matrix.

We believe this release will change the field of our application.

What's even more exciting for Synopsys is that we have a multiyear technology lead in this market.

Competitors are only just beginning to formulate their own integration strategy.

I would also like to highlight the growing strength of our analog and mixed signal verification tools.

These did quite well in Q1.

One example is Nadocen or faster resistant stimulator.

It is placed, its main competitor in two of the world's top 10 semiconductor companies.

Our mixed signal tool, a well integrated with VCS 7.0 and you can expect to hear more about our overall application platform this spring.

Let me talk a bit now about the competition.

While we enthusiastically believe that our platform strategy offers the best value proposition to customers, we obviously acknowledge that they are other players in EVA.

In practice, most customers today have mixed solutions.

Our largest competitors Kevin, for example has a number of valuable compliments to our existing design floors.

And while most of the startups are increasingly struggling to survive, some do provide interesting products to compliment our offering.

With our open platform, we can work with all of them, although our goal, of course, is clearly to gain market share.

Talking about market share, it is ironic that while the EDA market slightly shrunk in 2002, all EDA participants eagerly communicated market share growth throughout the year.

Obviously, this is some kind of new math.

The reality is that competitors fight intensively over customer budgets.

The larger EDA companies have advantage of position and installed base.

Synopsys has the added advantage of a well-established subscription business model that customers like.

During the quarter we substantially displaced one of our implementation competitors at two of the world's top Asic companies.

And we have seen them retreat in a number of other large accounts.

In addition, we know already 30-40, 90 nanometer designs that are in development using our tool set.

And we have seen the first tape out of real customer design.

Ultimately though, the only measures of success are revenue, earnings and cash flow.

In the midst of the rockiest market in high-tech industry, Synopsys is consistently delivering well against those metrics.

In other news for the quarter, we announced a definitive agreement to acquire Numerical Technologies.

By way of background, Numerical has products and services in the design for manufacturing markets or DFM for short.

The DFM market is perfectly adjacent to our main position in design.

It aims to facilitate the creation of the state-of-the-art lithography math using the manufacture chip.

In the last two years, this area has gotten increased attention at both complexity and cost of math have sky rocketed.

Together with Numerical, we will be able to address these issues and in the process grow the overall DFM market.

The direct adjacency of DFM to the Galaxy-designed platform is not accidental.

It will increase Galaxy's competitiveness in the eyes of the most advanced users.

This is exciting domain because of the size of the looming manufacturing problems at 90 nanometer and below and because of the financial benefits that improving yield will give our customers.

We expect to close the acquisition this quarter.

In summary, we are managing a very steady ship in very turbulent economic waters.

In Q1, we delivered the fist step on our integrated platform road map.

Many of our products saw upgrades, specifically our verification corner stone VCS saw it's most important release in the last five years due to general availability.

A stronger platform we opened up our database and we are making rapid progress in delivering on the integration of our products.

Finally, from a financial perspective, we executed to plan in Q1.

Looking forward, we will continue to be financially disciplined by aiming for steady revenue and earnings growth in 2003.

Let me now pass the call to Steve Shevick.

Thanks Aart.

I will first review the details of our Q1 results and then provide our guidance for Q2 and the rest of the year.

Total revenue for the quarter was 268.1m.

Ratable license revenue was 141m or 72% of product revenue.

For the quarter, 87% of our software products bookings were subscription licenses, above our target range and above historical norms.

Given the level of perpetual orders booked in Q4, but shipped in Q1, we have the freedom to focus more on subscription license bookings for the quarter.

The average duration of TSLs booked in Q1 '03 was three years consistent with our target.

Services revenue totaled 72.4m, down sequentially and up only slightly from the same quarter last year despite the addition of Avanti.

Services revenue has been negatively affected by a number of factors including the natural conversation of maintenance on perpetual and the terms licenses to subscription licenses, which bundle maintenance for software.

Lower levels of perpetual license, maintenance renewals as customers continue to cut corners by trying to get by without buying software support.

The decline in consulting and training driven by the macro economy and the consolidation of the Avanti and Synopsys customer contracts.

In reviewing our revenue forecast going forward, we concluded that we had underestimated the impact of these trends on our business.

Our aggregate EBG operating expenses including cost of goods were 199.6m, which was below our target range for the quarter 203-208, based principally on a lower than expected bad debt expense and other non-recurring savings.

Our EBG operating margin for the quarter was 26%.

We expect the operating margin to increase each quarter during the year and to finish with the full year operating margin of approximately 28%.

Other income was 9.2m within our target range.

Earnings before goodwill amounted to 68 cents per share, up approximately 150% from the same quarter last year and at the top of our guidance range driven by a combination of solid revenue performance and expenses going lower than plan.

As a reminder, EBG represents earnings on a diluted basis excluding amortization of intangible assets and in process R&D and this is the basis for this financial presentation.

The diluted share count was 76.6m shares.

Three were no merger costs, integration costs, below the line restructuring charges or other one-time charges during the quarter.

In connection, with headcount reductions implemented in Q1, we recorded a charge of 4.4m.

Unlike some of our competitors all of our termination related charges have been reflected above the line in operating expenses.

Settlement of the Avanti Cadence litigation, which occurred during Q1 was included in our Q4 financial statement and therefore had no impact on Q1.

Our customers continue to be under pressure to conserve cash, apparently regardless of how much cash they have.

Nonetheless, payment terms during the quarter improved a bit from last quarter, and were as favorable as they have been in the last four quarters.

Operating cash flow for the quarter was 43m, slightly above our expectations.

Cash and short-term investments continued to be strong with our Q1 balance ending at 470m or $6.14 per fully diluted share.

The net cash cost in Numerical acquisition, which we expect to close soon will be approximately $180m.

Q1 accounts receivable totaled 220.6m.

For the quarter, DSO was 75 days, up from Q4 of 2002, but more in line with historical levels, and not unexpected given the seasonal decline in revenue form Q4 to Q1.

Deferred revenue at the end of the quarter was 425m, up 14% from the same quarter a year ago, and up 14m or 3% from the previous quarter.

As you know, one of the principal benefits of the ratable license model we have adopted is that we have built substantial backlog.

In our recent 10-K report filed with the SEC, we reported total gross backlog of approximately 1.3b as of December 1, 2002.

We have gotten a number of questions in the past quarter about shrinking customer commitments and so called non-linear deals or transactions in which payments and revenue to be recognized are waited towards the later years of a multi-year license.

To date we have not entered into any agreements in which the total amount of revenue to be recognized from the customer has been reduced, or the schedule of such recognition has been pushed out with one exception affecting less than 4m of revenue over a four-quarter period.

In addition, with a few immaterial exceptions, we have not entered into nonlinear deals.

During the quarter, we did not repurchase any shares as we began negotiations with Numerical almost immediately following our Q4 earnings announcement, and thus we were blacked out while the repurchase window was open.

AS we announced in December, our board has approved a new $500m repurchase program.

We expect to resume repurchase this quarter as long as prices remain attractive as an efficient way to return excess capital to our shareholders.

In addition, we currently plan to implement a 10B51 program to repurchase stocks during periods when the window otherwise could be closed.

Headcounts totaled 4,161 employees at the end of the quarter, down from 4,240 at the end of Q4.

The change reflects the net results of the headcount reduction referred to earlier, the inclusion of the Avanti library's business in headcount and normal employee turnover.

Finally, I would like to describe our expectations for Q2 and the full fiscal year.

These targets assume completion of our purchase of Numerical Technologies in calendar Q1.

Completion is subject to several conditions, in particular, receive a regulatory clearances.

While I do not risk to take any thing for granted with respect to such clearances, we are optimistic that they will be received soon.

For that reason, we believe that it would be most useful to investors to roll the anticipated results form Numerical into our forecast beginning with this quarter.

For Q2, we expect revenue of $275-290m, total expenses of $207-214m, other I&E of $7-10m, outstanding shares of $74-78m, a tax rate of 32.5%, EBG of 67-72 cents per share.

We expect that orders for perpetual licenses will comprise 22-27% of our total software products orders in Q2, and in that approximately 75% of our target revenue is scheduled to come out of backlog.

Now, for fiscal 2003 guidance.

For the full year, we expect revenue in the range of $1.13-1.18b, earnings before goodwill in the range of $2.95 to $3.10, orders for perpetual licenses between 20-25% of total software product orders, the duration of subscriptions to be roughly 3-3.25 years, and reported revenue to be approximately 21-27% product, 51-57% subscription, and 19-25% services revenue.

Our adjustment for prior guidance are based on two factors.

First, we currently expect that the Numerical transaction will dilute earnings by under 10 cents per share in fiscal 2003 and will turn accretive in 2004.

As Aart mentioned, the Numerical transaction is extremely strategic for us and that it not only extends our addressable market, but also enhances the competitiveness of existing EDA products.

Historically, we have acquired acquisition either exceeding 25% hurdle rate for return on invested capital, or will contribute significantly to the strength of our strategic position.

The Numerical acquisitions does both.

Second, based on our latest field forecast, we have recalibrated our orders mix.

We have not changed our expectation as to the overall level of orders, but due to a variety of factors affecting the level of maintenance orders, which I discussed earlier in my remarks, and weakness in the consulting business, we are expecting a significant shift of orders out of maintenance and consulting and into subscription licenses.

We estimate the net impact of change on total revenue to be $10-20m over the rest of the year.

The revenue impact of this order shift will be partially offer by reductions in spending, but we have decided not to continue to manage the company to achieve $3.25 per share in earnings or $3.15 on a post-Numerical basis.

We believe that the strategies that we have in place are important to the long-term future of the company and will put us in a better position to capture market share going forward.

In summary, our performance in Q1 was very solid.

We have made a relatively small adjustment to our earnings expectations for the year, approximately 5%, to reflect the change in our expected orders mix, but we are managing well to the downturn.

With our platform strategy and the acquisition of Numerical, we believe we are gaining strength for the future.

Thank you for your attention, we will now open for questions.

Ladies and gentlemen, at this time if you would like to ask a question, please press the "1" on your touchtone phone.

You will hear a tone indicating that you have been placed in queue.

You may remove yourself from queue at any time by pressing the "#".

And if you are using a speakerphone, we ask that you please pickup your handset before pressing the numbers.

Again, if you would like to ask a question, please press the "1".

Take our first question from the line Sumit Dhanda with BNA securities.

Please go ahead.

Hi, guys.

A couple of questions.

First off, I noticed on the Q2 guidance you indicated that perpetual bookings would be between 22 and 27%.

Given that number was, you know, 13% in Q1, talk a little bit about why you expect that number to ramp up in Q2, and then why Q3 and Q4 should trend to 20-25%?

And then I have a follow-up.

So one of the reasons why perpetuals were low in Q1 was that we had a number of licenses booked in Q4 and shipped in Q1, and so that brought down the burden of shipping perpetual license in Q1 somewhat.

If you look at Q4 and Q1 combined at the overall level of perpetuals, it is in the low 20%.

So moving to Q2 is actually not inconsistent with history if you take the timing differences out of it.

Over the rest of the year, since we expect overall level of orders to ramp later in the year, we believe that the perpetual percentage will flatten out and come down a little bit.

And the follow-up I had was actually on the change in the order mix as you talked about.

So if I am to understand this correctly, your expectation for software product revenues are largely unchanged, what you are indicating is that consulting will be weak and then you are seeing a shift from maintenance -- from perpetual-type maintenance to subscription-type maintenance revenues.

Is that also dictated by the increasing percentage of subscription maintenances or are they're any other factors influencing this mix shift?

So, remember, Sumit, that perpetual maintenance shows up in services line, but maintenance components of subscriptions shows up in the ratable license line.

And so, when we have a shift of orders out of maintenance into subscriptions, the revenue on the maintenance line will go down.

The revenue on the subscription line will go up, but not as much because the subscription orders are going to be three years and the maintenance orders are one year.

Got you.

And so, basically it has to do with the fact also that your subscription bookings as a percentage of total bookings are going to be a larger percentage in that --?

Yes.

That is correct.

Okay.

Thank you.

Our next question comes from the line of Garo Toomajanian with RBC Capital Market.

Please go ahead.

Thanks, a couple of question.

You have mentioned in the past that you have planed consolidate contracts when you either in Avanti or Synopsys front end contract expires.

Can you give us a sense of how that is going in, in particular, I am interested in -- and what those sort of relative magnitude of these renegotiated deals are looking like?

Well I think, we have been fairly successful at negotiating -- at consolidating the contracts base.

So, I mean I am not sure what metric to give you, but I think it's going well and customers have welcomed that opportunity.

I don't know that there is a magnitude that I can give you.

I think, as these major customers have either have their contracts come up for renewal on onside or the other or have decided that there is some new products that they would like gain access to, we have taken that opportunity to consolidate both of the contracts.

Okay, so that is happening.

That is happening.

That will help us Steve.

I think last quarter you said that 30% of the Apollo seats had been upgraded to Astro, do you know where that stands right now?

Yes, we have continued to upgrade quite well Garo, we have moved from what we think about 30% to about 40% and in general I think that bodes well for Astro because its clearly the next generation placing out after Apollo.

Do you have a target for what the level might be like at the end of the year?

No we don't, because it's very much a function of where our customers are in their design, and so nobody in his right mind would upgrade in the middle of the design, but when you go to the next chip then that's the good time to do it.

And so it's not really under our control, although we will certainly assist customers to get there as quickly as they can.

Also on last weekend at EDAC, your forecast has been nearing quite period of course.

The other CEO's predicted industry growth of between minus 2% and positive 10% for the industry in '03, but I guess, your expectation is in that same range?

Well I draw refrain from setting expectation for the EDA market.

Clearly the CEO's have not been the best at predicting well for the industry, what I can say though is that we are clearly growing our revenue bases, we have been for the last few years.

We expect to continue this year, and in that sense we will be a positive contributor to EDA.

Okay and lastly for now, I am getting the sense that tool cost is becoming a big driving factor for design teams, and that is something that has always taken a back seat it seems to technology and productivity.

I am wondering what you guys are doing to be more sensitive to smaller budgets while submitting customer demands for new technology?

First it should not be a surprise when you have economic pressure, we look at cost everywhere and so, we anticipated this a while ago and that was one of the key reasons actually behind merging with Avant!, it would offer us a complete solution.

And so by virtue of having a complete solution, we can assist customers in reducing the number of their suppliers, in the process hopefully build a stronger relationship to us, but save some money and a lot of trouble in the process.

Gotcha, thank you.

You are welcome.

Our next question comes from the line of Jay Vleeschhouwer with Merrill Lynch.

Please go ahead.

Hi, thanks.

A couple of questions for you.

First of all did you ship all of the $30m plus in perpetual carryover that you had from Q4 and was their any material perpetual carryover form Q1 and now into Q2?

Secondly, on your last call, Aart, you talked about the growth in bookings for the combined PC Astro Apollo, and I was wondering if you had some update as to the combined growth of that in the most recent quarter or some update on the overall proliferation or deployment of PC itself?

Jay, the answer to your first two question are yes and no.

The answer to third question is that we are not going to give if PC Astro bookings metrics, I will turn it over to Aart to give some sense as to how the PC Astro flow is going.

Well increasingly we are looking at PC Astro as sort of one entity because, customers that driving state of the art design would like to have both of those tools utilized together, and so for the earlier comments on the upgrades towards Astro actually going very well.

It carries along PC and vice-versa.

And so, in that sense I think we are well on track with it.

Okay.

With respect to your comments on the MAPIN program, one thing that comes to mind is the opportunity that EDA or you specifically may have to change the relationship you have with EDA or R&D budgets.

Specifically, being able to capture the amounts being spent internally for overhead integration and the like.

Do you anticipate, Aart, that over the next couple of years you could in fact have an industry more materially capture that non-trivial amount being spent internally for in affect with MAPIN and open access do?

Jay, I think that is exactly what we like to do.

And there is no question that when you have a customer base that A, has economic challenges, but B also has the increased technical challenge of connecting up all the tools, making them work, and maintaining them; there is absolutely the opportunity to ultimately outsource significant portions of what today would be internal EDA or internal support.

I do not think that the internal support will go way entirely.

I do think that one of the indicators that we are going in the right direction is that more and more people are seeking a closer relationship with us.

And so that absolutely carries with it business opportunity overtime.

Thank you.

You are welcome.

Our next question comes from the line of Bill Frerichs with D. A. Davidson Company.

Please go ahead.

Good afternoon.

I was just wondering obviously Numerical is a public company, but I sense as business is changing quite a bit and I am presuming that a part of their licensing and OEM business as they have historically booked may go away under your assumption.

And I was wondering, what you see is the quarterly run rate of Numerical at the time you close?

So, is the OEM with Cadence off course has expired, and we don't see that as being renewed.

We haven't assumed that would be renewed.

As far the quarterly run rate's, I think we are not going to give quarterly's on Numerical.

It in the overall scheme of Synopsys business it's not that large.

Okay.

And so this new guidance does not -- for the full year guidance that you have given out dose not really assume a heroic contribution from Numerical on a revenue line?

Yes, very small.

Okay.

Thanks.

Our next question comes from the line of Arnab Chanda with Lehman Brothers.

Please go ahead.

Hi.

Just a couple of questions.

If you could just clarify point -- I think you said that you are not changing the directions or the linearity of the distribution contracts.

If you could explain, what exactly mean by that.

Do you mean basically that equivalent of amount was going to be recognized at any -- for any particular period of time?

And secondly it seems like you are talking about 3-3.25 years.

So are there -- are some of these contracts extending beyond 3 years?

And what's the reason for that?

Thank you.

Sure.

What I had said was that we expect an average duration to be roughly 3-3.25 years.

That's not changed from the prior guidance.

That is, refers to the length of the subscription of orders.

Anyway.

So, your other question was, why is -- in the duration of the subscriptions some are going to be shorter, and some are going to be longer, a lot depends on the particular needs of the customer who might for example need some tools to finish up a project and want assurance of licenses.

There are some customers who want to make a longer-term commitment, which is okay with us.

There are sometimes customers who will pick a specific technology they want to make a long-term commitment to which is good for us.

Just to note that the 3 years duration, this quarter is significantly down from last quarter.

Great.

Actually -- question on that linearity, are you saying that you recognized the same amount of revenue every say year in a contract or--?

So, our licenses are sure rateable in that sense.

Thanks a lot.

Our next question come from the line of Raj Seth with SG Cowen.

Please go ahead.

Thank you.

Steve, just for clarification, can you remind me what the assumption is in terms of product bookings growth across '03?

You mentioned that it hasn't changed.

But what is that assumption underlying your number--?

So I said that overall target for products, for bookings had not changed.

I didn't say what the growth number was, and we have not given bookings growth guidance for the year and don't plan to.

Okay.

Aart, can you talk a little bit about when you expect to be able to announce customer names in terms of their adoption of your platform, both you and Cadence sort of assert that everyone's moving towards platforms as you mentioned there's a lot of conflicting assertions about market share gains etc.

It's sort of hard, I think from our perspective to figure out what's really going on in the absence of customers that stand up and say; well we have switched from X to Y. How long do you think that takes, given the fact that evals and selection are just beginning to happen for the new platforms offered by both you and your major competitor?

Raja, I can commensurate with you in that its difficult to track market share because you have heard a lot of nonsensical statements overtime.

At the end of the day the only thing that matters is really how the revenue tracks.

I think that's going to be ultimately the single measure.

And the reason your question is difficult is because even when customers focus primarily on one platform, they tend to start out in a situation where they have many products from different sources and they will probably not abandon those products for a long time even in small quantity just to make sure that if they had to go back to an old chip, they could so.

On the other hand though I think what makes us believe that our platform has a stable future, is that many of the cornerstone product already well entrenched in the customer base and we can clearly see that having connected what used to be merely a year ago the traditional front end and the traditional back end in Synopsys and Avanti has immediately brought a high degree of attention from our customers because this is what they have wanted all along.

So in that sense I understand I am not giving you a very crisp message, but I am giving you a message with a high degree of confidence.

Do you expect to make major progress within the IBM where I think it would be fair to say Cadence has historically been strong over the next year or you think that much of your growth continues to come from your historic areas of strength which I think, it would be fair to say you been relatively stronger with the fab guys?

Clearly you always start from where your biggest strengths are on the other hand big opportunities are often where there is competition and so it is one angle that I would highlight as an area that we've been able to have strength across the board is in the addition of primates and at the end of the day when you look at chips there is one problem that really stands out over and over again and it's time enclosure and the effects around that.

And so we are in that sense solidly anchored in most of the IBM and certainly -- most of the [FSA] or the broader semiconductor fibers.

Last quick question.

Can you just comment on pricing in this environment?

Sure.

Initially one would think that pricing must be under enormous assaults because the economic pressure is high and people are looking for cost.

At the same time though we have sophisticated buyers and invariably will go through a phase where they really try to pit up against out competitors but at the end of the day they buy what they really want to buy and where they think they get the best product because relatively speaking the cost is a small proportion of their overall cost of ownership around the chip.

And so from that perspective we have actually not seen degradation in actual pricing although we have seen some immediate [inaudible] from the customer side to try to get that up righted.

All right.

Thank you.

You're welcome.

Our next question comes from the line of Jennifer Jordan with Wells Fargo.

Please go ahead.

Yes.

Good afternoon.

I was just hoping that you could comment a little further again on first what are you seeing with your floor plan compiler product where you are getting some traction with that product and how is the adoption going?

Joe, our floor plan compiler has some solid competition.

I think Cadence feel that they are initially good products which are very complimentary to the rest of our flow and so in the last couple of quarters we have intensified our investment on the R&D side.

We will expect to see the capabilities of that rollout over the next six months and so we absolutely believe that by December we will be very competitive.

And then Aart when you look at the next generation sort of the problems that come up in chips powers has been something that's been significantly discussed.

How do you see the tool set having to change to better deal with power constraints issues, does it need to become a constraint and none of itself like performance?

Jennifer I love this question because I think we have introduced power as an optimization criteria already in like 1992 or 93.

As a matter of fact even in the old days design compiler was able to trade off power versus speed versus area.

I think your point is well taken.

There is no question that power is becoming a much larger issue.

Just recently I heard somebody comment that the cost of maintaining a workstation in terms of power consumption is as high for one year as the cost of running the processor.

And so you can imagine that the industry is going to focus more on that.

To that effect we have put quite a bit of investment in the modeling of power all the way down to the effects of voltage changes and so on.

We are increasingly embedding this in all of our tool sets and our Galaxy platform has an objective to align not just timing and test but also power and already has a number of technical capabilities such as plug gating, support for dual voltage, etc.

Okay.

Thank you.

You are welcome.

Our next question comes from the line of Erik Desai with American Technology Research.

Please go ahead.

Thank you.

Steve I think you guys have to be commended for being very prudent with the one-time charge appreciated.

Thank you Erik.

Good to have you back.

Couple of questions here.

One is, could you give me the mid pick question on how much was investment gain income during the quarter?

I don't believe there was any.

I will get that number for you.

So, all 9.2m was roughly interest?

No.

Let's hang on a second I am getting you number.

The 3.8m and then we wrote off 1m in our venture portfolio.

Okay.

So the balance was interest and current fluctuation.

Okay.

Did you do any in the quarter that just ended, where there any product revenues recognized in the product that were of a term nature where they would recognize the front?

No.

We sell perpetuals and subscription licenses.

Purely.

Yes.

Okay.

And then I guess the little bit sort of looking down the transition to subscription licenses; obviously you have been on the path to be at 75-80% of your bookings for a while.

Do you think on a reported revenue basis you are almost there, I mean, I'm looking at the percentages.

Of course some percentage goes into maintenance etc.

Just trying to understand from your internal benchmarks.

Are you there yet?

No.

I don't think we are there yet.

We are getting closer.

Remember that the subscription licenses, all that revenue goes into ratable, nothing goes into service.

Correct.

We will be there when the subscription license part is 75% of the product licenses revenue.

The fact of matter probably we'll never get there.

I'm reminded that ratable license revenue was 72% of software product revenue, but also remember that the product revenue which is perpetual will fluctuate from to quarter-to-quarter and if that goes up that takes the percentage down.

Right.

Okay.

I guess, the more dicier question is, what kind of damages are you guys seeking from NASDAQ in the litigation in the end game?

Yes.

I don't think I will get into too much detail.

You could read the pleadings for yourself, but it's unspecified damages now plus in injunction.

And if I can get a clarification from the legal part of view.

If it's determined to be trade secrete versus patent violation, does that effect whether they can pay a royalty or is it just an absolute injunction?

Can you clarify that?

I am a CFO now.

Anyway, if injunction, in both cases you can get an injunction and injunction prohibits them from violating -- from using the trade secret or infringing the path.

In the pattern context there will sometimes be a court mediated or court determined reasonable royalty.

Thank you.

And next question comes form the line Tim Klein with Piper Jaffray.

Please go ahead.

Yes.

Steve can you talk about any notable deals I mean in terms of concentration in the quarter, percentage of bookings, product bookings gaining over 10%?

There was nothing over 10%.

Bookings were very well spread during the quarter.

And what's your expectation.

I mean is there, I guess you can probably see some renewals coming up.

What kind of should you look forward in terms of 10% booking kind of customer signings in the next few quarters?

I mean how shall we look at it?

We don't really have very good visibility on that at this point.

There may be some of that on a quarter basis, some more than 10%, but there won't be anybody who for the year is more than 10%.

Go ahead sorry.

No go ahead you can finish.

I'm sorry.

Okay.

I was going to move on to competitively I understand that your comment about nonsense little bit here, but I guess if you can help us understand in the light of this 33% year-over-year kind of growth for digital IC tools from your largest competitor.

I mean how should we -- may I understand you don't want to get bookings -- discuss bookings for the above Avanti, but can you give us something to counter against that because it's sounds like and it takes some more.

Is there any metric or other, you know, more stronger anecdote that you can provide?

Well the strongest metric is the bottom line, which is our revenue is growing and so -- I'm not the best person equipped to explain why a competitor would be growing up 30%.

What I think is clear, is that on our side, the combination of the front and tight to the placing out from Avanti is doing extremely well, and it has very rapidly become one of, I guess, the largest product in our portfolio.

That complicates little bit the analysis because they used to be separate products and then you don't want a -- you cannot really pursue each one of those on their own merit.

But fundamentally, we've had de facto very big in organic growth, obviously, with the merger with Avanti.

That merger is doing very well and I think we have got even better product than what we had hoped for.

Is there any metric you can give us in terms of the number of the Apollo Avanti seats penetrated with TC or something like that would -- can you provide us something on the normal...?

I don't have anything here, I guess we could figure something like that out.

But what we mentioned earlier is, primarily, how well after all has penetrated inside of Apollo.

This is clearly the first place you go as you want to grow things.

So maybe we should take this offline.

Okay, thank you very much.

You're welcome.

Our next question comes from the line of Dennis Wassung with Adams, Harkness & Hill.

Please go ahead.

Thank you.

Couple of quick questions.

First, for Steve -- you'd mentioned your guidance comments about percentage of revenue, I believe, in the next quarter; that's going to come out of the backlog.

Could you repeat that number?

Yes.

I believe it was 70%. 75% of our target revenues scheduled to come off of a backlog.

Net of the total revenue in the quarter?

Yes.

And was there a number for the full year?

No I did not give a number.

Okay.

I mean, remember that every quarter we book some and so that adds to what's going to come off backlog in succeeding quarters.

So a number right now is not that meaningful.

Okay.

Secondly, a question for Aart, I guess.

Just I guess, in terms of overall industry or what you're seeing at your customers -- you mentioned some stats in terms of customers working at 90 nanometer right now;

I am just curious as to what do you see as a percentage of design activity out there happening at the different technology notes?

What's happening 0.13?

What's happening at 90 nanometer?

And then I guess that the larger geometries, any I guess, any anecdotal information that would be helpful.

Sure, first to clarify 90 nanometer is the leading edge of the leading edge.

And so by definition you'll see very few designs that are in many cases pilot designs to really demonstrate the things work well.

I would say all the advanced designs and I mean literally pretty much all, are all being target at 130 nanometer, although much of the fabrication today is still 180 and talking to many of the fab guys; they expect that 180 will hang around from a fabrication point of view for long time because they have a wole bunch of eight inch that they really want to fill, now that these things have been depreciated.

And so, what I would conclude for us is that it is important to be close to the 90 nanometer because it helps solidify to 130; 130 has had the number of challenges during last year from the yield perspective that is mostly behind us and so in that sense, people are starting to see more chips rolling off of the 130 nanometer line.

Okay, also -- you'd mentioned some commentary about payment terms being better, and this for Steve, in the quarter and just curious as to, I guess, how do you -- what's the rational behind that?

You mentioned that it's -- they are as good now as they were over the last four quarters.

What you see as the dynamic happening behind that?

We've been very successful at our collections effort in bringing in the longer term receivables and then in negotiating with customers, protecting on the perpetual licenses.

We've been very successful at getting very prompt payment.

Okay, see this is not really, I guess, the changing dynamic at the customer level that you're seeing...?

I think its too soon to tell.

Okay.

And I think also this is going to fluctuate from quarter to quarter.

We are in a fairly narrow range.

I think, the good news is that it didn't deteriorate over the quarter; actually got a little better, but time will tell.

Okay, and I guess, lastly another question for Aart.

You talked a little about the design for test side of the business before.

Can you just give any information on that side of the business with the logic this product you have talked about at your Analyst Day and, I guess, how were the things are going on that side of the business?

That's part of the business we are really excited about because we have now seen a number of very sophisticated and I would say complex chips adopt built in self test.

That is what we are talking about when we say SOC disk.

And the reason they would like to adopt this is because of the cost of the testers and the cost of the testing time is enormous for large chips, and so if you could do some of the testing inside of the chip that makes a lot of sense.

I noted for that to be practical; the SOC disk solution have to be able to simultaneously add the test and watch for timing and for area and all the other constraints, and I think our product does that extraordinarily well.

So this is a product that we think we will see very-very good growth.

As a matter of fact, we have already a number of tape outs on it, so this is no longer trial and error.

There is reworking done with it.

I guess that was going to be my follow-up question.

It's so sounds like, customers are actually using a same production at this point and the tools gaining, I guess, share if you want?

I believe so.

You hear me, be very reluctant with this work share because of the all the nebulous comments that have been made over the years.

But this is one way the product is doing very well.

As a matter of the fact even though our test solution has been hide already to some of the tester companies and so being part of a orchestrated ecosystem here makes a lot of sense for the users.

Okay, thank you very much.

You are welcome.

At this time, we have just under five minutes remaining for the conference call.

We will move on to our next question from the line of Alex Guana with UBS Warburg.

Please go ahead.

Yes Steve, you mentioned that the Numerical contribution would in fact be small, but I was wondering if the revenue recognition model similar to yours and that it's backhand loaded and provided we get it closed to this quarter, you would get a substantial portion of stated 10m or greater on revenue coming in this quarter?

A lot of assumptions buried in that.

One of the things that happens when you buy some company with purchase accountings that you lose much of their deferred.

So lot of what Numerical recognized quarter-to-quarter came off of their deferred from maintenance on the Caps product, we will get almost none of that.

On the other products, it's a slightly different business model because of the PSM revenue and its also slightly different because of the Cadence OEM is going away.

So that leaves some perpetuals on Caps.

We expect that their license model will convert to ours and match that relatively quickly.

So if the question was, will there be an end of the quarter kick in perpetual licenses, I think the answer is no.

Okay, fair enough.

And Aart you mentioned that the 90 nanometer design activity out there cutting edge with the cutting edge, which struck me as remarkable that you are in 30-40 implementations that you know, I wonder if you give you a little more color on that?

Is this on the synthesis, is this backhand, is this verification, is it across the board?

For starter, this is across the board, meaning that it is using all of our products from front-end to back-end.

I am not surprised that we would be far and away the leader on all these advanced chips because they have a set of constraints that are really hard to meet and also specifically has a number of capabilities that are very unique for 90 nanometer.

If I look at the list of players, it is a little bit of who is who of the most advanced semiconductor guides and most driving fabulous semiconductor guide.

To give you a sense that it's 30 or 40, a large number, well we think that 90 nanometers probably in the low percentage points in terms of the number of chips being done and being strong there early on, I think goes well for us.

Tell me if I understood it correctly; 30-40 is a very large number given where we are in the 90-nanometer roll out?

Well given how difficult this chips are; the answer is yes; it is a large number and I just don't want to underestimate the time it will take for 90 nanometer to suddenly become mainstream and then we still have the whole 130 nanometer to go through.

But this bodes well for us and we specifically asked our team the question this week to tally it up and they actually new '03 tape out that's have already been done.

So things are progressing in the right direction and people are absolutely, at least those can are absolutely investing in 90 nanometer because they see future differentiation for them.

Right and correct me if I am wrong.

There is a feedback in terms of the development of our tools that you benefit from this steep tape out and also the work you have done at the 130 nanometers.

I am wondering if there might be any war stories you can tell about 130 nanometers, taking us down this 90 nanometer curve.

As I stated earlier in general, our customers are not too appreciative if I tell they are war stories because these can be pretty tough and you probably have heard about the many yield issues that people had of the 130 nanometer, specifically in the first two-three quarters of last year.

What we did find is necessary for 90 nanometer is that there is a whole additional set of so called design rules.

So those are the rules that you have to follow when you do the layout to make sure that the yield is acceptable.

Some of these design rules are pretty hairy and requires place and route enhancements.

We have done those and then finally, we have all set of enhancements that you have to do to the verifications rules to make sure that you actually live up to design rules.

Although this sounds pretty complicated, probably, but that's the way it is, and you are absolutely right that because we participate in some of the hairy edge, we get absolutely the early benefit from that.

Okay.

Thank you.

You're welcome.

We now have a follow-up from the line of Sumit Dhanda with Banc of America Securities.

Please go ahead.

Hi Steve.

On the collection metrics, I recall that last quarter you indicated that you were collecting within a year the cash associated with your subscription licenses in 50-60% of the cases.

Has that number stayed in that range?

And then I have a quick follow-up.

Yes, a very comparable, a little better on a one-year basis than last year -- than last quarter, I am sorry.

Okay.

Great.

The other question I had was, in terms that you -- given the current economic situation, the likelihood of some of your potentially -- the likelihood of some of your customers could actually had to file for bankruptcy.

Have you looked at your backlog and assessed the risk from such a customer base?

And what percentage of your backlog would you think at that risk?

Actually, we look at our backlog on a continuous basis to review the credit quality of the companies in there.

Over time, our historical loss experience is very low, under 2%, and we expect it to stay that way.

And then a final question.

In terms of -- how you ship sort of the seats associated with your software?

Is it typically for a three-year subscription license that you ship it all upfront or is that staggered over the course of the contract?

How does that typically work?

It's staggered over the course of the -- I am sorry -- I didn't actually hear the question.

Can you repeat that?

For example, I mean, let's assume you're shipping 100 seats associated with a particular contract.

Is that all shipped upfront in a subscription type contract?

Yes.

I am sorry.

The answer is yes.

When we sell a 100 seat to the subscription, they are all shipped upfront for the term of the subscription.

And not relatively over the course of time?

No, not all.

There are a few occasions when we have incremental increases in the number on seats, but it's very small increments.

Okay.

All right.

Thank you Steve.

Sure.

Operator I need to add one correction to the number I gave out on gain on equity investments figures.

So that number is $7.5m in the quarter and not 3.5.

And there was $1m written-off venture investments.

And at this time, I would like to turn the conference back over to the host panel.

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We think that we had a strong quarter and that we are looking forward to solid growth going forward.

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