新思科技 (SNPS) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys third quarter fiscal 2003 earnings conference call. (OPERATOR INSTRUCTIONS).

As a reminder, today’s call 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 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 may be projected.

In addition to any risks that may be highlighted during this 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 and 10-Q reports of Synopsys, on file with the Securities and Exchange Commission.

In addition, Synopsys would like to advise you that financial and other statistical information to be discussed on this conference call, as well as a reconciliation of non-GAAP financial measures discussed on this call to GAAP financial measures, is currently available on the Company's Web site.

The Web address for such information is www.Synopsys.com/corporate/invest/invest.html.

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

Please go ahead, sir.

Thank you, operator.

This is Aart De Geus, and I have with me Steve Shevick, our CFO.

I will start by briefly reviewing our performance during the quarter.

Then I will give an update on our end markets, our industry and our platform initiatives.

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

We will conclude, as usual, with Q&A.

Starting with results, fiscal Q3 was another solid quarter for Synopsys.

Book-to-bill was above one, and revenue came in at $300 million.

This was at the top end of our target range of 288 to 303 million, and above First Call consensus of 298 million.

Year-over-year, revenue grew 27 percent.

Our strong revenue results, paired with careful expense management, led to earnings before goodwill of 82 cents.

This was at the top of our target range of 77 to 82 cents, and above First Call consensus of 80 cents.

Year-over-year, EBG grew 55 percent, a strong achievement given our share count went up while our stock price reached a three-year high.

We separately announced today that the Synopsys Board of Directors has authorized a two-for-one stock split.

Steve will provide additional details on this topic in his remarks.

Q3 was another well-executed quarter.

With three solid quarters under our belt, we are on-track to deliver on our full-year revenue and earnings targets.

As we have noted throughout the year, the semiconductor industry continues to experience a modest, quiet recovery in 2003.

In Q3, we did not see any meaningful change to the environment from what we told you last quarter.

Most customers I interact with continue to voice cautious optimism while being vigilant in their short-term spending.

Visibility over the next three to six months has clearly improved from a year ago, but remains murky beyond that timeframe.

From an end application perspective, in Q3, we saw the strongest demand in the consumer, Wi-Fi, PC handset and automotive sectors.

Notwithstanding the ongoing economic challenges, our customers continue to move towards smaller feature sizes.

Although manufacturing at 130 nm is still in its early stages, most advanced designs are now aimed at that geometry.

In addition, we are presently following a small but growing number of design starts at 90 nm.

Today, we track roughly 120 design starts at 90 nm, up from about 90 such starts last quarter.

Synopsys is the primary supplier of EDA tools for most of these advanced designs.

And at the cutting edge, we're working with a handful of customers who have begun process development at 65 nm.

From Synopsys' perspective, as our customers have now fully adjusted to the post-bubble reality, their philosophy towards EDA vendors has evolved in a way that is positive for us.

While this year's modest recovery in the semiconductor industry has yet to be felt in overall R&D spending, and thus, aggregate EDA spending, customers are making larger commitments to fewer vendors.

They're less willing to devote scarce resources to cobble together product from multiple niche suppliers.

Many customers are turning to more complete solutions, both to save money and to decrease risks.

As a result, strengthened by a complete IC design product portfolio, we have aggressively gained market share at our competitors' expense.

For example, in Q3 and early Q4, we closed significant agreements with two very large semiconductor companies.

They are phasing out many competitors' tools, and are standardizing largely on our platforms over a two to three-year period.

Increasingly, our renewed agreements are for a larger percentage of customers' EDA budgets.

They comprise a broader set of EDA tools than the original contract, and displace our competition.

We're typically renewing agreements with customers earlier to take advantage of existing weaknesses in our competitors' product portfolios.

In addition, as we have expanded Synopsys' portfolio and design for manufacturing and intellectual property, we are engaging with customers on a broader basis.

From a geographic perspective, regional contributions returned to normal levels.

North America led the way with a good quarter, returning to its normal contribution of about 60 percent of revenue.

Our sales team continues to execute well.

And we have already signed more large orders in Q4.

Global and strategic customers have been the most active, reflecting consolidation in the customer base.

The European market has been stable, though not stellar.

Nevertheless, we were ahead of plan in Q3, driven by a couple of large opportunities.

In Japan, although the overall economy remains relatively weak, the semiconductor industry has stabilized to some extent.

This change is due mostly to continued demand for consumer product, as well as the positive impact of restructuring that has taken place over the past few years.

Following on a very strong Q2, Japan exceeded plan in Q3.

We believe that agreements signed in both Q2 and Q3 planted seeds for continued gains in this region.

Lastly, Asia/Pac was mixed.

Even though travel to and from the region has rapidly picked up again, economic growth predictions for Asia/Pac have fluctuated throughout the year, and now appear to have stabilized.

The major foundries are modestly more optimistic, as they see utilization rates increase, and end-user inventories decrease.

We've broadened our relationships with government-sponsored incubation vendors in China, laying the groundwork for future growth there.

Let me now comment on the progress that we have made in Q3 from a product perspective.

As you're all aware, early this year, we began to roll out our integrated product platforms for design and verification, called Galaxy and Discovery, respectively.

As our customers move from 180 to 130 and 90 nm, they see increasing challenges in timing closure, signal integrity, power consumption and design for tests.

Our Galaxy Design Platform is aimed at addressing these challenges, and is doing well in the marketplace.

Galaxy includes, at its core, the anchor products of Design Compiler, Physical Compiler, PrimeTime and Astro.

We are releasing the platform in modules that have common timing, constraints, libraries and comprehensive treatment of problems, such as signal integrity.

In this last area, we've already made excellent progress in addressing cross-talk, noise, I/R (ph) drop and electromigration with the release of Galaxy SI in Q3.

All four of the anchor products in Galaxy Platform had good quarters.

Design Compiler and Physical Compiler saw solid growth year-over-year.

Physical Compiler exceeded plan as we added nine new logos in Q3.

DC Ultra, our high-end version of Design Compiler, added 24 new logos in Q3, and represented about 20 percent of our DC orders in the quarter.

PrimeTime exceeded its Q3 plan, led by PrimeTime SI.

PrimeTime SI had a record quarter accounting for roughly 40 percent of all PrimeTime orders.

This is excellent news, because it validates our strategy to seek additional upgrade revenue opportunities from our installed base.

Astro did very well in Q3 against a tough comparison with the year ago quarter.

In fact, it has gained share against our largest competitor.

The upgrade from Apollo continues very much on-track.

As Astro now accounts for 70 percent of our entire place-in-route installed base, up from roughly 60 percent a quarter ago.

In addition to upgrades, 11 customers have newly added Astro to their flow in Q3, and customers across the board have provided good feedback on the latest release shipped in July.

As a strong endorsement of our technology, we were pleased to announce, during Q3, that Renaissance is standardizing on Astro.

Another exciting product line for us is power analysis and optimization.

This is an area that is growing rapidly as customers move to smaller geometry.

We have focused on the power problem for several years, and now have very seasoned products that work well in our design platform today.

The power products have already made their plans for the year, and we will undoubtedly see some more growth.

In tests, our new built-in self-test solution, which was introduced in Q1, is doing well.

In Q3, we announced that ATI who was doing high-performance graphics chips, adopted our products for their advanced test needs.

On the verification side, we made excellent progress as well.

Early in Q3, we announced our Discovery Verification Platform.

It includes a new RTL formal verification product, Magellan, and a powerful new design for verification methodology built on the rapidly emerging System Verilog standard.

During the quarter, we communicated our commitment to System Verilog as the future design language of choice.

The response from customers has been overwhelming.

Many designers have been yearning for a more powerful language for years, while simultaneously wanting to retain compatibility with their past work.

System Verilog offers exactly that.

Our System Verilog road map has already had positive impact on our verification business, and has accelerated the interest in our Discovery Verification Platform.

Discovery is anchored by our leading VCS 7.0 simulation engine.

Its new capabilities not only verify the functionality of a circuit, but also automatically check any restrictions to its usage.

The new design for verification features, supported by VCS 7.0, have led to the introduction of a new product, Magellan.

Magellan, which performs hybrid formal verification, is used to find very difficult design bugs.

It is already in production use at five major accounts.

VERA, our testbench automation solution, had strong year-over-year growth and adoption.

As it continued to win head-to-head benchmarks against its main competitor.

Finally, to round out our verification offering during Q3, we acquired Innologic Systems, a provider of technology to verify embedded memories.

Our verification platform couldn't come at a better time for our customers, since they're already spending two-thirds of their overall design time on verification.

Discovery had another key enterprise win in Q3.

One of the largest semiconductor companies is standardizing on our platform for their verification needs, displacing our competitors' tools.

Our verification business exceeded its bookings plan in Q3, with significant growth over the last year.

In addition to depth of our investments in the Galaxy and Discovery platforms, we're also growing the breadth of our platform.

To place more emphasis on high-growth and emerging markets, we have created a new ventures business unit, headed by Sanjiv Kaul, a seasoned BVA (ph) veteran and long time Synopsys employee.

The new ventures group is initially focusing on design for manufacturing, or DFM for short, as well as analog mixed signal and electromechanical design.

For example, in Q3, we announced our partnership with Airbus, to develop a new version of Saber for electromechanical simulation.

Airbus and its subcontractors are using this version of Saber to design a new A3AD jumbo jet, a market that will present new opportunities for us.

Finally, to conclude the review of our product, let me highlight our IP business.

We saw significant year-over-year growth led by design-ware cores, which are sold on a per project basis.

The average size of design-ware transactions is growing, as companies are looking to us to be their primary provider of standards-based IP.

Design-ware cores had its largest quarter to date, with a very strong showing from our USB product.

We believe this business offers the potential for good growth in the future.

In summary, we are pleased with the progress we're making on our product portfolio.

We are now broadening our focus to adjacent market opportunities, and we are growing share with key customers.

In light of today's economic situation, we will continue to manage the company with rigorous financial discipline.

Let me now pass the mike to Steve Shevick, who will give you the financial perspective and guidance for the coming quarter.

Thanks, Aart.

First I will review the details of our Q3 results, and then I will provide our guidance for Q4 and the full fiscal year.

Q3 was a very solid quarter for Synopsys.

Total revenue for the quarter was $300 million, at the high end of our guidance range, and 2 million over the First Call consensus.

Book-to-bill was above one.

Orders were flat versus a strong third quarter in 2002.

Verification and intellectual property had particularly strong quarters from an orders perspective, demonstrating our growing strength in these areas.

Orders linearity was very good.

Revenue linearity was consistent with prior quarters, with less than 10 percent of total revenue recognized in the last week of the quarter, demonstrating one of the key benefits of our ratable license model.

For the quarter, subscription license revenue was 161 million, up 9 percent sequentially from Q2.

Revenue from perpetual licenses was 75 million, down 7 million from Q2, reflecting lower reliance on perpetual licenses this quarter.

For the quarter, 79 percent of product bookings were subscription licenses, near the high end of our target range, and 21 percent were perpetual license is.

The average duration of TSLs booked in Q3 was 3.9 years, above our target range of 3.3 to 3.6 years.

As our ratable revenue model becomes more fully phased in, this measure has become less meaningful, because customers are typically renewing their license agreements well before expiration, and such early renewals tend to exaggerate the true TSL length of new bookings.

For example, this quarter, we had only one agreement with a booking of 16 million that was longer than 3.6 years.

In an effort to provide more meaningful information on backlog, and the future revenue expected from TSLs, beginning with this quarter, we will provide the revenue signature of our aggregate backlog and deferred revenue as of the end of each quarter.

As of the end of Q3, the aggregate backlog was scheduled to turn to revenue as follows -- 42 percent over the next four quarters; 43 percent in the following four quarters; 20 percent in the third year; and 4 percent, thereafter.

To give you some perspective, at the beginning of fiscal 2003, these percentages were 43 percent; 32 percent; 18 percent; and 6 percent, respectively.

As this indicates, we are managing a remarkably stable backlog profile.

We will provide both of these measures through the end of fiscal year 2003.

Services revenue totaled 64 million, up a bit from Q2, but down approximately 12 percent from Q3 of last year.

Services revenue remains under pressure, due principally to continued tightness in the market for design consulting services and training, and continued pressure on maintenance orders.

From a geographic perspective, all regions were back within their historical contribution ranges in Q3.

North America accounted for 60 percent to total revenue;

Europe for 16 percent;

Japan, 13 percent; and Asia/Pac, excluding Japan, 11 percent.

Our aggregate EBG operating expenses, including cost of goods, were 206 million, which is slightly below the bottom of our target range for the quarter of 207 to 214 million.

Expenses were lower than expected, due to careful expense management, and in part to a $1 million reduction in our allowance for doubtful accounts.

This reduction was driven by the significant improvement in the aging of our accounts receivable, and is determined by a formula that has been in place throughout the year.

Our EBG operating margin for the quarter was 31.4 percent, a couple of percentage points higher than expected.

We expect a similar operating margin for the fourth quarter, and now expect to finish the year with a full-year operating margin of over 29 percent, an increase of at least 1 percent over the expectations communicated last quarter, and approaching our target annual operating margin of 30 percent.

Other income was 4.7 million, below the low end of our target range of 6 to 9 million.

Among other items reflected in the total are one-time gains from the sale of assets of 7.3 million; and approximately 2 million in write-downs on investments in our venture portfolio.

Beginning in Q4, we expect a significantly lower level of other income than we have been seeing over the past several years.

Earnings before goodwill amounted to 82 cents per share, up 55 percent from the same quarter last year, and at the top of our guidance range, driven, as noted above, by a combination of higher revenue and lower expenses than planned.

As a reminder, EBG represents earnings, on a diluted basis, excluding amortization of intangible assets, in process R&D, and other merger-related items.

This quarter, net income, on an EBG basis, also excludes certain charges relating to our acquisition of Innologic Systems.

A reconciliation of EBG to GAAP appears in our earnings press release.

The diluted share count for the quarter was 81.3 million shares, more than 2 million above the top of our guidance range.

During the quarter, approximately 5.7 million options were exercised, which represented almost a third of all vested options, as our stock price hit a three-year high.

The trend in our stock price also increased the dilutive effect of remaining stock options, as calculated under the treasury method.

The increase in shares was offset somewhat by an elevated level of stock buybacks during the quarter.

We repurchased approximately 2.6 million shares of Synopsys stock for an aggregate purchase price of 159 million, at an average price of $60.78 per share.

As of the beginning of the fourth quarter, approximately 273 million remained in the repurchase program authorized by our Board.

We expect to continue repurchasing this quarter, as long as prices remain attractive, and to extend our 10B51 program, allowing us to repurchase stock during periods when the window would otherwise be closed.

Cash flow was very strong in the quarter, based on better than expected collections.

On a GAAP basis, operating cash flow was approximately 126 million.

Backing out 7 million for merger disbursements in the quarter, operating cash flow on an EBG basis was approximately 133 million.

For the first three quarters of the year, therefore, operating cash flow, on an EBG basis, equaled 320 million, or $4.09 per fully-diluted share.

Based on our current projections, we expect fiscal 2003 EBG operating cash flow to be in excess of 400 million, and an excess of 350 million on a GAAP basis, taking into account merger-related disbursements and other items throughout the year.

Cash and short-term investments continue to be strong, with our Q3 balance ending at 568 million, or $6.98 per fully-diluted share.

The significant increase over the Q2 cash balance largely resulted from collections on accounts receivable and the proceeds of stock option exercises.

Q3 accounts receivable totaled 202 million, a decrease of 44 million from last quarter; and DSO was 61 days, down 77 -- down from 77 days in Q2 -- in both cases, reflecting strong collections during the quarter.

Deferred revenue, at the end of the quarter, was 448 million, down 29 million from the end of Q2, due to a higher percentage of orders being invoiced quarterly in advance as opposed to say, annual in advance.

Total backlog, which represents the future revenue that is locked in, and is a better indicator of our long-term commitments from customers, grew sequentially in Q2, and we expect further growth in Q4.

Headcount totaled 4,408 employees at the end of the quarter, up from 4,353 at the end of Q2.

Before I move to guidance, I'm pleased to announce that the Synopsys Board of Directors has approved a two-for-one stock split in the form of a stock dividend, effective on September 23rd, 2003.

The split will have a number of benefits for Synopsys and its investors, including improved liquidity, and reduced volatility of EPS.

Now, for our Q4 and full-year guidance -- for the quarter, we expect revenue of 305 to 320 million; total expenses of 212 to 219 million; and other INE (ph) of zero to 4 million; outstanding shares of 81 to 85 on a pre-split basis; and 162 million to 170 million on a post-split basis; a tax rate of 32.5 percent; and EBG of 77 to 84 cents per share on a pre-split basis; and 38 to 42 cents per share on a post-split basis.

On other metrics, we expect that orders for perpetual license will comprise 21 to 26 percent of total license orders; and that the average duration of subscription licenses will be roughly 3.5 to 3.8 years.

Approximately 72 percent of our target revenue is scheduled to come out of backlog.

For the full year, we expect to be at the high-end of our previously stated revenue and earnings ranges.

But for the purposes of giving you full-year targets on this call, and in our press release, we have adjusted them to make the math consistent with our three-quarters of actual results and the Q4 targets described above.

For the year, we expect revenue in the range of 1.165 billion to 1.18 billion, a refinement of our prior guidance of 1.13 to 1.8 billion; earnings, before goodwill, in the range of $3.05 to $3.15, on a pre-split basis, versus our prior range of 2.95 to 3.10.

On a post-split basis, we expect earnings of 1.52 to 1.57.

On other metrics, we expect that orders for perpetual licenses will be between 20 and 25 percent to total license orders; reported revenue will consist of approximately 21 to 27 percent product revenue; 51 to 57 percent subscription revenue; and 19 to 25 percent services revenue; and that the average duration of subscription licenses will be between 3.4 and 3.7 years.

In summary, against what is still a challenging environment for our customers, we have continued to execute according to our plans, built product momentum and taken share at key customers.

With the solid performance in Q3 and our visibility into Q4, we have increased confidence that we will deliver on our revenue and earnings targets for the year.

Thank you for your attention.

We will now open for questions.

(OPERATOR INSTRUCTIONS).

Our first question is from the line of Mr. Jay Vleeschhouwer with Merrill Lynch.

Please go ahead, sir.

Thanks.

Good afternoon.

Steve, for you first.

Can you talk about the contribution from any deals in excess of 10 percent of revenues and whether there were any perpetuals carryover revenues from the third into the fourth quarter?

And then, on the product side and bookings side, Aart, can you talk about when you expect general availability of the Galaxy platform?

You had set it back, that it would be late summer.

Can you talk about GA for that?

And then a follow-up on Astro.

Okay.

No customer accounted for more than 10 percent of revenue.

There was one order that was more than 10 percent of orders.

And I forgot the other question.

Perpetuals carryover.

I'm sorry.

A very minimal amount of perpetual carryover from Q3 to Q4.

Jay, on Galaxy, Galaxy is a large collection of many products.

And what we have learned in the last six months or so is that many customers don't want to wait until a much more complete platform -- would like to see increments and deliveries immediately.

And so, what we've done is, instead, start to already provide them with new releases of many of the products as they come closer together.

Good examples for that are, as a matter of fact, Astro, which had a very strong release just in July, as well as Design Compiler, which had a release in June, with significant improvement.

And so, we think that the strategy of essentially making the capabilities available as soon as they are ready suits our customers well, and allows us to incrementally move things closer together.

Okay.

Actually, one more, if I can question for you, Steve.

Since you gave us the percentage of backlog you expect to be recognized over time; but when you exited fiscal '02, you had then about 720 million in backlog recognizable for '03.

What do you think that amount might be, exiting 2003, as you go into 2004?

Yeah.

We're not going to forecast that far in the future; we will take that up after Q4.

Okay.

Thanks, very much.

You're welcome.

Our next question is from the line of Garo Toomajanian with RBC Capital Markets.

Please go ahead.

Thanks.

I've got a few questions for you.

Steve, can you go over one more time why the license term duration is increasing?

Sure.

I think the best way to look at it is really to look at what's happening in the market now.

And that now that we have differentiated and complete product portfolio, we're going back to customers to expand our share of the budget at the key customers.

That these are ongoing relationships, so, we're looking to grow commitments; we're looking for displacements; and looking to give them new technology.

We're not waiting till the expiration of our current agreements.

And we never actually have done that.

The thing is, when you go back to a customer and sell them incremental technology, it has an effect on the TSL duration that makes it look longer.

And that's the example I gave of only one deal longer than 3.6 years.

I think we've been calculating in a very conservative way, different than the way Cadence calculates it.

So, in an effort to provide more transparency, we decided to give additional metrics.

Okay.

Good.

And Aart, maybe for you -- you mentioned in your commentary some competitive wins in both the IP implementation side and on the verification side.

Was in one side of the house, actually seeing more competitive wins than another?

Well, the verification side has really rolled out a whole bunch of new capabilities in the last six months.

And so, from one quarter to another, these things change a little bit.

I wouldn't want to draw too big a trend there; but verification is really opening up a whole new era.

You know that we've called this design for verification, just like many years ago, tests moved from tests to design-for-test, verification is moving from simulation to design-for-verification.

And in that context, the road map that we have shared with our customers resonates very, very strongly.

The selection of System Verilog and its capabilities fits, to a tea, what many of the designers have wanted for a long time.

And I think all of these have been components why the Discovery Platform has done so well, specifically, last quarter.

You also mentioned some new Design Compiler seat sales; or were those maybe upgrades from DC to DC Ultra?

They are mostly upgrades, because, you know, Design Compiler is used by so many customers, it's rare that we find somebody who's not using it.

Design Compiler Ultra really has additional capabilities.

And in that sense, is an upgrade; and that is actually very good business for us.

But you did also mention that there was a number of new logos.

What types of -- what's the profile of those guys?

Um, (multiple speakers)--

(multiple speakers) any start-up companies?

I need to look at it -- look it up.

But I think it's mostly small start-up companies, which is -- I want to see that as a positive sign;

I don't want to overstate the fact that there's a lot of new start-ups, because there aren't.

But, the few there are tend to pick Synopsys.

Okay.

Great.

Thanks, very much.

Our next question is from the line of Sumit Dhanda with Banc of America Securities.

Please go ahead.

The orders, you said, were flat versus the third quarter of last year, if I recall correctly.

Was that, you know, on an apples-to-apples basis, because you didn't have a full quarter of Avant! contributions last year?

That was including the contribution to Synopsys orders in Q3.

Okay.

So, I guess the clarification I'm looking for is, was it just, whatever, half -- half, or a little more than half a quarter of Avant! contributions last year compared to a full quarter this year?

Or is it stand-alone Synopsys and Avant! last year versus the combined entity this year?

Yeah.

Well, it includes the Avant! orders post-merger; and it does not include any Avant! orders with pre-merger.

But basically, there wasn't very much.

And most of -- there was pretty much of a -- some pent-up demand, post-merger, that got included in our third quarter last quarter -- or last year.

Okay.

And then a couple of other questions.

Could you explain what you indicated as it relates to deferred revenue line being down this quarter?

Sure.

First of all, you've got to remember that deferred represents only a portion -- less than a third of the overall backlog.

And so what happens to deferred in any quarter depends principally on the structure of payment terms of our contracts; and really, more specifically, whether TSL customers pay upfront or get quarterly payment terms or something like that.

During the quarter, we just saw a higher level of quarterly-type payment terms, which has an impact on the overall balance of deferred.

That's why we tend to look at the overall backlog and what happened to that; and that grew in Q3.

Okay.

A couple of more questions if I could.

Number one, could you quantify, you know, the percentage of cash collections, as it relates to your subscription licenses, which were done, you know, within the year, per se, for the full contract?

And then, what did you say your expectations are for percentage of revenues for the fourth quarter that are coming from backlog?

Percentage of revenue coming from backlog, I think I said, was 72 percent.

In terms of the quantification of the payment terms, we haven't split it out by license type.

Compared to past quarters, the amount collected in the first year was a little bit lower.

Okay.

Thank you.

And, our next question is from the line of Raj Seth with SG Cowen.

Please go ahead.

Thank you.

Aart, I know it's a little early, but you're already in Q4; and I am curious how we should think about growth this next year, from a bookings perspective.

If you can't be precise, maybe you can give us sort of an order of magnitude or a range.

How should we think about growth, moving forward?

Okay.

Well, you described the situation correctly.

A little early, because we have just started our planning process for next year.

At the same time, I think if you look at a combination of the economic environment, the historical growth, the strong product portfolio that we have right now, and our market share, our sense is that, on a long-term basis, we should certainly be in the target of double-digit growth.

But that's sort of as precise as we're going to get today.

So, somewhere between -- that's long-term -- what does long-term mean?

Does that mean a couple of years from now?

Or does that mean sometime next year?

It means that we didn't say any more about it at this point in time, I guess.

Long-term means that from a -- maybe the word I could have used otherwise would be steady-state.

And so, next year could very well fall in that general neighborhood.

Okay.

One other question.

Your major competitor -- your largest competitor -- talks a lot about how this business is a renewal-driven business; and at some level, debates the assertion about share gains that you guys have forcefully made.

Can you comment on how renewals do or don't drive bookings performance in this industry from your prospective?

Raj, you know, as we have commented numerous times, we have ongoing relationships with customers; and many bookings are enlargements, renewals; it's hard to know which is which.

We just don't look at it the same way they do, and don't comment on renewals.

If I were them -- I'm not sure I'd advertise the extent to which my installed base was up for grabs next year.

Yeah.

And as you look in Q4, Steve, what's your pipeline look like?

Is it a number of very large deals you see?

How does the -- what's the profile of the Q4 pipeline look like?

The Q4 pipeline looks good;

I'm not going to give you the breakdown on it.

But it looks very good for now.

Okay, thanks.

And our next question is from the line of Rich Valera with Needham & Company.

Please go ahead.

Thanks.

Steve, maybe to follow up on that last question -- would you care to compare your Q4 bookings pipeline to the Q2 bookings pipeline?

And maybe just where you think bookings could fall in Q4 relative to your record quarter in Q2?

No.

Any color at all on that, just in terms of the relative strength of the pipeline, entering the two quarters?

It's a big pipeline; and Q4 is traditionally our biggest quarter.

Okay.

Following up on that, looking at the -- your revenue guidance for the quarter -- the low end would be barely a sequential increase from the third quarter, given your subscription model, and as you said, the typical seasonal strength in the fourth quarter.

That would seem pretty conservative.

Is that just -- you're just doing the math to be at the high end of your range?

Or what might cause you to be sort of at that low end of the revenue guidance for the fourth quarter?

I'm sorry.

I was distracted.

Can you repeat the question again, Rich?

Sure.

Just talking about your revenue guidance for the fourth quarter, it would appear to just be a very small sequential uptick.

And I was saying with the fact that you're sort of building subscriptions, which would tend to typically result in a sequential increase, and you have a strong seasonal quarter, you know, what might -- are you just being sort of -- working the math in terms of being at the high end of your previous guidance range, and that's why it sort of results in this -- what looks like a small number?

Or is there something that might cause you to be at that low end that, you know, we should know about?

No, there's a subscription increase.

There's an increase from subscription.

I'm not sure what you're driving at, actually.

It just seems that in a seasonally strong quarter, and -- that I'd expect to see a little more -- just a look bit more -- of a sequential uptick than that, in the low end of your revenue guidance.

Well, I mean, obviously, revenue has multiple components.

There's also the services revenue.

And I would look for a somewhat lower level of services revenue.

Subscription revenue will pick up.

Okay.

Great.

And one final question.

Just with respect to the transition to 90 nanometer, which, Aart, I think you commented on, some other EDA vendors have been suggesting that maybe the transition from 130 to 90 might actually be quicker than the transition to 130 has been, since maybe some of these manufacturing issues of 130 have been ironed out.

Do you sort of subscribe to that theory at all, Aart?

No, I don't.

I think that all of these transitions have sort of their own momentum; it takes time to get the yield at the level that is satisfactory.

And, we're now in a domain where each small geometry does bring a host of new design problems, which incidentally, is not bad for us, because we provide many of the tools to deal with those.

And so, I think the transition will be gradual.

What I hear from the semiconductor guys is that they are sort of anxiously looking at what percentage will make it into 90 nanometer, because they know that the cost for 90 nanometer is higher -- significantly higher than 130.

And the advantage primarily comes out of two areas, either if you need to really drive the speed of chips, or if you have truly very high-volume, and there, the small geometries help you.

And so, I think that jury is still very much out.

I do believe that the numbers we gave you in terms of the rough number of designs we are tracking -- 120 or so -- is a good indicator of what the real status of affairs is right now.

Great.

Thank you.

And our next question is from the line of Bill Frerichs of D.A.

Davidson & Company.

Please go ahead.

Good afternoon.

I am curious about the venture activity.

Is this to be a venture capital activity?

Or is this a skunk works, internally?

Or how's it going to operate?

And what are the main focuses going to be?

You mentioned design for manufacturing.

Is that pretty much it?

Or are there other areas?

Okay.

Maybe the term is a little bit misleading because it has the word venture in it, which sort of indicates things that are small.

I think the way to read it is, things that have high promise for growth.

And so, we're starting off right away with actually quite a substantial business there under Sanjiv that has both the design for manufacturing, which is OPC, ERCDRC checking, as well as what used to be numerical technologies.

And then it has, also, all the analog mixed signal, which is a substantial business, given that we're number one in mixed signal verification.

And then there are a number of other pieces such as T-Cad and the electromechanical simulation.

So, many of these areas that have great promise in their own way, some of which are new markets that have to be truly creative.

And so the term "new ventures" covers the spirit well.

Okay.

That's helpful.

Thank you.

Our next question comes from Jennifer Jordan with Wells Fargo.

Please go ahead.

Yes, good afternoon, Aart.

Just a couple of questions.

One is, you talked about the pipeline, or maybe Steve here talked about the pipeline for the fourth quarter being strong.

One of the things that some of the smaller competitors have talked about is, activity or visibility into the pipeline definitely improving even though people haven't been willing to turn on the spigot; and you echoed that.

Do you have a sense -- when you were talking about things returning to more historical growth rates next year, that that's what people are waiting for?

Are they waiting for next year's budget cycle before you see things start to open up?

Well, you know, I think in the last three years, waiting for the next budget cycle has been sort of the same as Waiting for Godot.

You know, it kept moving every six months, every six months.

I think we correctly called that there was a bit of an uptick, starting really calendar Q1 this year, and Q2 -- we saw some of that reflected in our business.

But mostly the change at that time was a return to a reasonable level of visibility.

And, with that, I would say a modicum of steady-[stayed] growth.

The few people that we're sort of hoping for -- you know, let's go back to the '99 and 2000, those have sort of, meanwhile, declared bankruptcy.

So, the realists are in business now, and they manage their business with an assumption of semiconductors of very gradual growth, no big downsides, no super upsides.

Um-hum.

Good.

And then interestingly to me, it looks like the elements that are now under Sanjiv and the new venture activity group here are very similar to the configurations of things you've signed within Mentor (ph) Graphics.

Any comments on that?

Well, I guess Mentor Graphics has good taste in some of those instances (ph), and that they are a strong competitor and a worthy competitor.

It is clearly, specifically, in the DSM (ph) arena, a new market that I think will be built with a few strong companies.

And so, if they are doing well there, we will do well and vice versa, probably.

Okay.

And finally, you mentioned a specific displacement by -- of someone with the Discovery platform during the quarter.

Do you care to comment on who was displaced?

If we cared, we probably would have commented already.

In general, you find that we tend to be coy about using customers' names unless we have very explicit approval; but also because we have found over and over again, that working under the radar scope is probably a better business strategy.

Okay.

Thank you.

And our next question is from the line of Yolanda Pope (ph) with Adams, Harkness & Hill.

Hi.

Actually, this is Dennis Wassung.

A couple of quick questions.

First, Steve, if you could give me the split again on perpetual in Q3 and TSL?

The perpetuals were 21 percent;

TSLs were the rest.

Right.

Got you.

And that's bookings, right?

That is product bookings, yes.

Dennis Wassung Okay.

Also, you talked a little bit about -- some of these new ventures, Aart, with the DFM space; and you also mentioned DFT earlier on.

Any commentary in terms of progress in those areas?

You mentioned DFT as if it was -- I don't know if it's going to more important -- you talked about some important developments there.

Anything you want to add there?

Sure.

I've always been [-- and the answer is yes] for design-for-tests.

This started many years ago as people moved from just ADPG to scan chains.

The big change in the last -- what was it -- two, two-and-a-half, three quarters for us, is the introduction of SoCBIST.

That's standing for built-in self tests, where the idea is simple.

You put a piece of the tester, essentially, on the chip, and it tests itself, which can reduce test costs.

And we have introduced such a capability late last calendar year.

And, it is doing very well.

Maybe the update I didn't give so far is the fact that we have not only seen quite a number of tape-outs (ph); we have seen, actually, a number of chips come back, functioning very well, and either saving money or -- and that's an interesting insight -- many of the users do more tests with this, in order to improve the quality of their parts.

And, I think we will see more of that in the future.

Okay.

Great.

Also, you talked about System Verilog, and customers with really good feedback.

Anything else you want to talk about there in terms of -- I guess what kind of feedback?

Are customers basically just very excited to start using products based on the technology?

And what is the timeline that you see for bringing these products out?

Well, the first version of System Verilog for simulation is available.

There are a set of enhancements that are already accepted by the standard bodies that are being rolled out as we speak.

And this is all on the simulation side.

What we also said is that we have committed to provide Synthesis capability from it, which we said we would roll out towards the end of this calendar year to a number of customers.

We have, meanwhile, already gotten some very good alpha feedback from customers.

So, it's very much on-track.

But what is exciting here, really, is that this fills a void that has been growing over a number of years in simulation, as the Verilog and VHDL languages have gradually gotten old compared to the design challenges.

And so we think that System Verilog will do very, very well in this.

And would you characterize some of the wins you've had in the last quarter or two, as a pretty good result of the focus on System Verilog at this point?

Yes, I think System Verilog is very much at the center of gravity of the long-term road map and vision because many of the capabilities that we are rolling out -- or have rolled out recently, and will be rolling out -- all benefit or leverage the language.

And so, in general, what customers like is the fact that there is a much broader vision on where verification is going; that we have some very strong technical deliverables right now.

And, specifically, VCS 7.0, I think, understates what it really does. 7.0 gives the impression of just the one after 6.0.

In reality, it is a much, much stronger release than we've had for many years, as it incorporates new capabilities.

And so, it's really a combination of a road map and a direction that we very much agree upon, sensing that System Verilog is indeed the trend for the future; and then very practical deliverables today.

Okay.

A couple of other quick ones here just on the overall environment.

You talked about end market strength in a few areas.

Is there any change there in the strength that you've seen in the end markets in the last quarter or two?

I don't think that there's, actually, all that much change.

I must say, I keep being a little bit surprised at how strongly the consumer market is holding up.

And it's only one of the reasons that Japan has fared better than expected.

It's certainly at the center of gravity for Asia/Pac.

And, I think, in many ways, maybe it should not be a surprise, because computation and communication really find their convergence in consumer products.

And so, the economy may have been tough in the last three years; but technology has definitely moved forward; and it's in the consumer products that we're going to see the benefit of that.

Okay.

And lastly, on the environment, you talked about sort of better visibility than you had a year ago.

I guess, you talked about not much of a change from last quarter.

And so, I guess, how would you characterize the visibility that you have today?

I guess, looking versus a year ago, is it substantially better?

Is it back to normal levels?

I guess, a little more commentary there would be helpful.

Sure.

Just to clarify, the visibility I mentioned was the visibility of our customers.

You know, our own visibility has been quite strong, in general, because of the ratable business model, which has served us extremely well coming into the quarter with 70 plus percent of revenue.

And so, the reason, of course, the visibility for the customers is important is because, when there's no visibility, there is certainly also not the courage to spend a lot of money.

And that visibility has improved, I would say, markedly in the last nine months, where just last December, people would say, you know, I have no clue what January or February is going to look like.

That's not the way customers communicate today.

They do see a fairly steady-state business for the next three to six months.

They just sort of wonder sort of what do things look like after Christmas.

Okay.

So looking at their increased visibility at this point, you're seeing more follow through on them -- on your customers -- basically releasing more product into design -- is that fair?

I think that's -- they know better -- if the designs have a chance to find a market.

The number of projects is not something that increases and declines massively from one day to another.

Clearly, it's been a tough time the last few years.

But people kept investing in designs.

Many of the designs, two years ago, frankly, just didn't find a market.

Now, you can sense that there's a little bit crisper market windows for these projects, and people, therefore, start to pay a little bit more attention to schedules again.

Great.

Thank you, sir.

Our final question will be from the line of Erach Desai from American Technology Research.

Please go ahead.

Hi.

I had a couple of questions.

Steve, if I were to look back a year ago, in terms of the revenue that quarter that you posted, that did not include numerical and inSilicon.

So would 290, year-over-year, be a fair compare versus the 300 you did this quarter?

You know, Erach, I'm not going to venture what it would have been with or without.

I think that those companies have been integrated here.

And we view them as part of Synopsys.

So I'm not going to go into (multiple speakers) --

Okay.

You have been disclosing that in your Q, though, right -- when it comes out?

We did, in 2002, disclose Avant! with and without.

Right.

Yeah.

But, on a quarter-to-quarter basis, I think we will not go into that.

I don't know what the numbers are.

Fair enough.

If you look then at the fourth quarter compare, year-over-year, (indiscernible), I believe, and I'm traveling -- I apologize -- that you did about 320 million last year, and that's the high end of the range this year.

What I'm trying to get too, not to be cagey is, what is the sort of underlying growth rate, currently?

Revenue, last -- Q4 -- was 309.

Okay, 309 (multiple speakers) --

And, our range is 305 to 320 here.

Okay.

Fair.

Thank you.

Okay.

Okay.

With that, that concludes our conference call.

Thank you, very much for attending it.

We're looking back on a strong Q2 -- Q3 -- sorry -- time flies here.

And as usual, Steve and I will be available for questions after the call.

Have a good evening.

Bye-bye.

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