新思科技 (SNPS) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, good afternoon, or evening and welcome to the Synopsys fourth quarter and full fiscal year 2003 earnings conference call. Now at this time all participants are in a listen-only mode. However, later we will conduct a question and answer session. And those instructions will be given at that time. Just as a note, if you should require assistance during the call press star zero and an operator will assist you offline. As a reminder today's conference is being recorded for replay purposes and that information will be announced at the conclusion of our call. Ladies and gentlemen, today's conference is scheduled to last one hour. Five minutes prior to the end of the call I will alert the conference of the time remaining.

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 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 the conference call, important factors that could cause the Company's actual results to differ materially from those that may be projected in this conference call are described in the most recent 10-K and 10-Q reports of Synopsys on file with the Securities and Exchange Commission. In addition, Synopsys would like to advice you that the financial and other statistical information to be discussed on this conference call as well as the reconciliation of certain non-GAAP financial measures discussed on in call to GAAP financial measures is currently available on the company's website. To access the address for such information it is http://www.synopsys.com/corporate/invest/invest.html.

I would like to turn the conference over to Aart De Gues, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Thank you all for joining us. This is Aart De Gues and I have with me Steve Shevick, our CFO who will go through the financial results and guide in a few minutes.

In summary, 2003 was a milestone year for Synopsys. We were able to grow bookings in a very economic environment. We successfully integrated the biggest acquisition in the industry history and became the largest EDA company on a bookings and a revenue basis.

Turning to the fourth quarter we ended fiscal 2003 on a solid note with Q4 revenue of $316.5 million and pro forma earnings per share of 44 cents. Book-to-bill was above one. Looking around us consumer demand for high volume low cost electronics has clearly been key to the recent improvements in the semiconductor industry. At the same time, rising fab capacity utilization is changing the supply demand dynamic and should enable a better pricing environment for our customers in 2004. This has all contributed to the semiconductor industry association improved outlook for semiconductor revenue growth next year. Despite the much more positive landscape, next year's R&D spending forecast are generally lower than revenue growth forecast because trends in long term and demand are still hard to predict. To get a better sense of what we expect we compiled analyst estimates for revenue in R&D growth for the top 25 customers. We found that revenue is expected to grow in the 15-20% range in 2004 while R&D expense will likely grow in the low single digits. Over time, we believe that R&D expense growth will more closely mirror long-term semiconductor growth.

I think the EDA industry to grow even faster than R&D. Here is why. For one, designers need much more EDA software to complete designs than ever before. In addition to the traditional front end Synthesis and back end place in route tools chip designers need software that deals the increasing problems of the signal integrity and power consumption, they also need much smarter and faster verification software to verify the accuracy of their designs and stay on schedule. They needs blocks of IP to minimize schedule risk, reduce costs and add potential differentiation to the chip design. In the newest growth area they need design for manufacturing software to make sure that chips go to the fab without any major hiccups that could negatively affect yields.

All these trends are positive for EDA and especially favors Synopsys. To manage costs and risks customers prefer to buy more of the broader set of solutions from a single source. Increasingly Synopsys is their first choice. With many years of focus on advanced chip design, today we are the only company that is integrating a complete set of design verification and design for manufacturing software with broad IP offerings and services that consistently earn high marks in customer satisfaction. Although we have a very large individual product portfolio Synopsys is best understood in terms of two major platforms. Design and verification and two significant market initiatives, IP and design for manufacturing.

In the design area, remember that 18 months ago we closed the largest acquisition in the industry history. After successfully integrating field and operations in the first six months, we have also aligned the engineer initiatives. This alignment as enabled the R&D teams to begin delivering a continuous stream of new releases and enhancements. The engineering team has moved to the third phase of integration the development of new products that were not previously possible. We are presently showing an aggressive product road map to the customers and are receiving good feedback.

In design software, Synopsys is the clear industry leader with over 50% market share. Due to our ability to deliver the highest quality results with the lowest risk of failure. As a technology oriented company, we understand that the individual components remain as important as the over all platforms. For example in the Galaxy design platform we recently shipped a new version of Astro, our place and route tool. This new release greatly improves capacity quality and timing correlation with PrimeTime the gold standard in timing signoff. Last quarter Astro added 17 new logos and simultaneously increased the apollo to Astro upgrade percentage to over 70% of total installed seats, which is roughly three times what it was a year ago.

Another example Physical Compiler which combines placement and Synthesis technology added key new signal integrity features and most importantly we achieved improved integration with Astro. Physical Compiler added 12 now logos in Q4. Our emphisis on technology leadership is paying similar dividends in Synthesis. There we see customers adapting the most advanced version of design compiler DC ultra which. PrimeTime SI the high end version of PrimeTime which has built in advanced signal integrity analysis also showed strong adoption rates. PrimeTime SI made up about 30 % of all PrimeTime orders for the year. These enhancements don't come for free. Astro DC ultra and Prime Time SI all require customers to may upgrade fee. The SOP business product is winning the high end market.

We're also leading the industry in the area of solutions for power management. These products had the largest quarter in their history as customers address the power challenges at the smaller 130 and 19-nanometer nodes. Synopsys is the primary provider of software tools for the great majority of the roughly 150 design starts that we track at 19 nanometers. Of the 41 completed that we know of of over 70% used the full galaxy design flow. We are confident we will continue to be the preferred provired of the leading edge solutions.

Longer term the design for manufacturing software as it is integrated into the Galaxy design platform will add differentiation to design solution. In the design for manufacturing software segment, or DFM for short, which includes all the tools needed to prepare manufacturing, the investments we made in the last 12 months, both internally and externally, have yielded a significant new market opportunity. We are the largest and most come prehensive supplier of the software with about 55% market share of $170 million market. We expect that market to grow in excess of 30% per year for the foreseeable future.

Our fourth quarter was the largest booking quarter yet for our DFM business. Notably we closed a major inventory enterprise transaction with a top ten semiconductor company, the largest single product order in Synopsys history. We believe that our ability to gain market share in both the design and DFM areas will accelerate even more as customers move to 90 and 65-nanometers. Those nodes require design and manufacturing solutions to be tightly woven together. We are the only company to offer solid solutions in both areas. And, we provide the critical value of integration of the two. Our competitors suffer from either missing big pieces of design or from having nothing of consequence in manufacturing.

A key area where our technology focus is paying off is verification. Our objective is to expand our market share from about 30% this year to 50% over the next 2-3 years. The Discovery verification platform is hitting the mark with customers. Since its release in January of 2003, Discovery has already averaged one large enterprise win per quarter at the expense of our competition. That includes two large enterprise wins in the fourth quarter. Our leadership role in system Verilog the emerging next generation verification language was a key asset in these wins. Customers are investing in long-term design for verification strategy, while at the same time wanting the best price performance solution on the market today. Both of those strategies are met in our Discovery verification platform. In Q4, we announced our analog mixed signal verification solution, Discovery AMF. Discovery AFM seamlessly integrates analog and digital simulation, providing the fastest mixed signal verification available. Capitalizing on our momentum in this area, we will continue our aggressive verification product release schedule in 2004.

An exciting growth market that interseconds both our verification and design offering is IP. Wins for our design ware IP portfolio were substantial in Q4 and the growing product line continues to increase in market share. After having had bad experiences with low quality IP from other vendors, many customers are reducing the number of IP suppliers they work with and consolidating the business with reliable vendors like Synopsys. This consolidation has translated into a number of multiyear multimillion dollar contracts for our IP. The IP orders grew over 50% year-over-year and we are clearly the New Mexico one provider of connectivity IP. Our design ware library of foundation and verification IP continue to do very well also. Almost all of our major customers use it. In fact, I can say with certainty that virtually all the digital chips in the world today contain some Synopsys IP.

Looking at the big picture, we are closing the year on a strong note. Our major business thrust acquisitions and technical investment strategies are moving into rapid alignment and we are first in line with customers as their spending picks up. In 2003, we completed the transition from tool company to full solution supplier. This transition culminates at the very moment that customer is of reducing technical and financial risks by choosing one referred partner in EDA. We are that partner of choice. As evidence of our progress as a full solution provider, in 2003 we has ten transactions each over $30 million in sigh up from just three in 2001. We plan to use the number one position in the EDA industry as a springboard into the broader silicon infrastructure market. This $60 billion market encompasses all the vendors that support the conception, design and building of a chip from design software to capital equipment. We're already forming key partnerships with a number of semiconductor capital equipment companies. They increasingly see us as a strong ally in the never ending quest for higher yields. In the coming years, our goal is to become the first company in EDA to reach $2 billion in revenue.

We thank you for your support throughout the last year and invite you to our investor date conference in New York on December 8th. There, you will hear more about how Synopsys will help drive industry trends that I have discussed today.

With that I will turn it over to Steve for further details.

I will review the key details of the Q4 and FY03 results and provide the guidance for Q1 in fiscal '04 and make a few comments on '05. Beginning today, we are providing expanding disclosure on inventory and backlogs. For your convenience, a copy of our remarks and all of the numbers I discuss will be posted on the website.

During this call, I will discuss our financial perform on a pro forma basis. These include amortization of intangible assets, in process R&D and other merger related charges and this quarter charges relating to work force re-alignment implemented at the beginning of fiscal 2004. A reconciliation between pro forma results and forecasts and GAAP results and forecasts appears in the press release or financial supplement. All results and guidance reflect the two or one stock split completed in September.

Over the past three years an average of 75% of the licenses have been renewable licenses effectively one to three year leases to the technology. The other 25% are perpetual. Revenue on renewable licensed is recognized over the term of the license and revenue on perpetuals is recognized up front. Beginning in fiscal 2004 we will shift the license mix significantly in favor of renewable licenses while maintaining the current 75/25 balance between orders with time based revenue recognition and orders with upfront revenue. We will do this through the use of term licenses a third type of license that has attributes of both time based and perpetual licenses. Term licenses have a fixed term usually three years and are renewable thereafter like the current rateable licenses. Revenue is recognized on term licenses either up front by a perpetual license or over time, similar to sub subsubscription licenses defending on the payment terms. We expect revenue recognized up front on roughly two thirds of term licenses and usually around two years on the rest. We do not believe that will have a significant impact on cash flow.

Term licenses offer customers another license option when buying our software and this flexibility is attract attractive to them. For us it offers opportunities to expand our share of customers budgets. We sold a small amount of term licenses in fourth quarter less than 3% of total licenses as a test of customer demand and the feedback from the field organization was very positive. Beginning this quarter we will sell perpetual licenses on an exception only basis. In short, for the year we expect perpetuals to account for less than 10% of license orders and renewable licenses to account for over 90%. We will maintain the 75/25 split on revenue recognition. We think the 75/25 model is a good model for the business and do not foresee the need to change it.

As we discuss the financials when we used the term time based licenses or TBLs it will include both rateable licenses and term licenses on which revenue is recognized over time. Up front refers to perpetual licenses and term licenses on which the revenue is recognized upfront. We will use the term renewable licenses to refer to subscription licenses and all term licenses.

Let me now turn to the Q4 and FY '03 results. The fourth quarter was the highest revenue quarter ever with revenue of $316.5 million dollars. Within the guidance range of $305 million to $320 million. One customer accounted for more than 10% of revenue for the quarter. Full year revenue was 1.18 billion. Also a record for Synopsys and at the high end of the guidance range of 1.165 to $1.18 billion. Revenue increased approximately 30% over revenue in fiscal 2002 on a purchase accounting basis. No single customer accounted for more than 10% of revenue for the year.

From a geographic basis, all regions were within their historical contribution ranges for Q4. North America accounted 62% of total revenue, Europe 16%, Japan 13% and Asia Pacific 9%. Q4 was a solid quarter as measured by bookings. Book-to-bill was between 1.2 and 1.3. Going forward we will provide the measure on a quarterly basis. Over the year book-to-bill typically varied greatly from well below one in the first quarter to well above one in the other quarters. Order are within the target range for the quarter. One customer accounted for more than 10% of orders in the fourth quarter. For the year total orders were 1.37 billion, an increase of 12% over 2002 on a purchase accounting basis. No single customer accounted for more than 10% of orders for the year.

During the quarter, up front licenses represented 32.5% of license orders. This includes 15-20 million in upfront orders taken in Q4 or 6% of license bookings that turned to revenue after Q4. Excluding the orders upfront would have represented approximately 26.5% of license orders. For the year, TBLs were 75% of license orders and up front licenses were 25% of license orders. Hitting our 75/25 target split and incremental improvement in renewable licenses compared to a 73/27 split in 2002. The average length of all customer licenses was slightly under three years. The average duration of such committments calculated under the weighted average method we have been using was 3.5 year at the low end of the guidance range of 3.5 to 3.8 years. For the full year the average length of renewable commitments was 3.1 and weighted average duration 3.5 years within the target range of 3.4 to 3.7 years.

Going forward, we will provide the average length metric only, which we believe is consistent with the rest of the industry. As of the end of the fiscal year, our aggregate noncancelable backlog which excludes consulting was $1.61 billion. A 17% increase from 2002 on an apples to apples basis. This represents noncancelable customer commitments. Over 80% in 2004 and over 60% of the target revenue for the full year is scheduled to come from noncancelable back log. This revenue recognition is a key advantage of our license model. Aggregate pro forma operating expenses for the fourth quarter were $212 million at the low end of our target range of $212 million to $219 million. Pro forma op eighting expenses for the year were $827 million including savings of $5 million from the planned July 4th week shutdown in North America. In fiscal 2004 we will close the North American facilities between Christmas and New Year's and for the fourth of July week an effective way to save on expenses, without sacrificing production. Our pro forma operating margin for the quarter was a very healthy 32.9%. For the year the pro forma operating margin was 29.7%. Ahead of our beginning of year forecast and very close to our long-term targe of 30%. Other income for Q4 was $2 million within the target range of 0-4 million and consisted principally of interest income and net gains from the sale of venture investment. The pro forma tax rate 32.5% throughout the year.

Beginning in fiscal 2004 we reduced it to 31% as a result of the reorganization of our international operations that became effective at the beginning of fiscal 2004. Weighted shares out standing 164.4 million within the targe range. Pro forma earnings was 44 cents per share, 2 cents above the top of the gied range of 38-42 cents per share and 2 cents over the first call consensus, driven by a combination of higher revenue and lower expences than forecast. For the year pro forma 1.59 per share an increase of 43% on a purchase accounting basis.

For for any company undergoing a shift to a time based license model, one way some investors have measured earnings performance is look at earnings on a fully converted or normalized basis as though the rateable model were fully phase the in. One way to do this is to take orders minus expenses plus other income and expense tacket tacket effect and divide it by diluted shares outstanding. On that basis for 2003 the fully converted earnings were $2.41per share and we expect fully converted earnings to grow in 2004. Cash and short-term investments were $698 million at the end of Q4 an increase of over 20% as compared to 2003. This puts us in a very strong position to conduct our stock buyback program and invest strategically in the expanse of the business.

During the quarter we purchased 1.1 million shares of Synopsys stock at an average price of $31.32 per share and expect to increase the pace of repurchases this quarter. As of the end of the fourth quarter approximately $239 million remained in the repurchase program and as of today the Board renewed the program and topped up the amount available to $500 million. In addition, we are adopting a new plan to permit to us purchase shares during our normal blackout period. Q4 accounts receivable totaled $201 million, flat from last quarter and DSO was 58 days down from 61 days in Q3 in both cases reflecting strong collections and impact of payment terms granted during the quarter. Deferred revenue $420 million down $28 million from the end of Q3 reflecting a shift toward more quarterly payment terms. Aggregate backlog, which includes both deferred and off balance sheet deferred, increased during the quarter. Typicallying aggregate backlog decreases in Q1 and grows throughout the year. We expect it to grow in fiscal 2004.

Head count totaled 4,480 employees at the end of the quarter no change from the end of Q3. At the beginning of November we reduced head count by 241 employees as part of the ongoing effort to realign the investment in the product portfolio and as a result a $15 million charge in Q4. Over the year we expect to open approximately 171 new positions leaving a net reduction of only 71 71 position positions. The estimated reduction in expenses in 2004 is approximately $19 million.

Cash from operations on a GAAP basis was approximately $114 million in Q4. On a pro forma basis, free cash flow was $112 million. Pro forma free cash flow equals GAAP cash from operations less Cap Ex of $17 million and excludes $15 million in net merger related disbursements and charges related to the work force re-alignment. For the full year cash from operations on a GAAP basis was $392 million. Free cash flow on a pro forma basis was $398 million or $2.51 per fully diluted share, reflecting Cap Ex of $50 million, merger related disbursements of $44 million and $15 million relating to our work force realignment. Cash flow for the year also reflects a net tax benefit of $94 million from the payment made to settle the [INAUDIBLE] Cadence dispute in November of 2002.

I will now describe our expectations for 2004. Our first quarter targets are as follows. Revenue between $275 million and $290 million. Total pro forma expenses between $205 million and $211 million, including savings of approximately $3 million from a holiday shutdown in North America. Other income and expense between an expense of $1 million and income of 2 million. A pro forma tax rate of 31%. Outstanding shares between 159 million and 167 million and pro forma earnings between 28 cents and 32 cents per share. We expect TBLs to account for 67 to 72% of product orders and up front licenses 28-33% of license orders. We expect TBLs to contribute 60 to 65% of total revenue, up front 18-23% of total revenue and services 16-21% of total revenue.

The targets for the full year of as follows. Orders between $1.425 billion and $1.475 billion. Quarter distribution of order is as follows. 10-15% in the first quarter. 22-27% in the second quarter. 20 -25% in the third quarter and 40-45% in the fourth quarter. In other words we expect orders in the first half of 2004 to be 5-10 percentage points lower as a percentage of total orders than in the first half of 2003. The quarterly distribution is driven as much or more by the timing of large contract renewals and event price transactions as by seasonality however, and therefore these numbers are subject to adjustment.

We expect revenue between $1.20 billion and $1.25 billion. Quarterly distribution of revenue is as follows. 20-25% in the first quarter. And 24-29% in each of the second third and fourth quarters. Although revenue growth is lower than orders growth this does not mean that the license model transition is complete. Given the fluctuations in orders from quarter to quarter the ramp up pre proceeded at a some what uneven pace. In addition 2004 revenue is affected by several specific factors including the bookings quarterization and decline in annual maintenance in 2003 and revenue signature of certain FY '03 renewals. We believe that 2004 represents only a temporary lull in revenue growth. We expect 2005 revenue growth to be very strong. We expect pro forma operating margins between 28% and 30%. A pro forma tax rate of 31%. Pro forma earnings per share between $1.50 and $1.60. Pro forma free cash flow of over $1.80 per share assuming payment terms and collections consistent with the fourth quarter of 2003. A net tax impact of $105 million. And Cap Ex of $30 million. We expect TBLs to account for 75-80% of license orders and up front licenses to account for 20-25% of license orders. We expect TBLs to contribute 57-62% of total revenue, up front to contribute 21-26% of total revenue and services to contribute 15-20% of total revenue.

Beyond 2004, we have looked at 2005 on a steady state basis to give investors an idea of how the model will continue to develop over time. We have assumed achievement of the targets in 2004 on all metrics, mid single digits growth in orders excluding acquisitions operating margin of approximately 31%. A constant license mix and revenue signature and orders quarterization at the historical average. On that basis we would project 2005 revenue of approximately $1.4 billion and pro forma earnings per share over $1.90. With GAAP earnings of over $1.50 per share.

In summary, 2003 was a solid year. We enter 2004 with a plan to grow faster than the industry with a large and growing back log and with an increase emphasis on renewable revenue.

With that we will now open for questions.

Thank you, sir. Ladies and gentlemen, as you just heard if you have questions or comments queue queue up apt at this point. Press star one on your phone keypad. You will hear a tone indicating you have been placed in queue. You may remove from the queue by pressing the pound key. To ask a question please press star one on your touchtone phone. Representing Merrill Lynch your question comes from the line of Jay Vleeschhouwer.

I would like to ask you the bookings outlook for 2004. Split that out perhaps in terms of your expectations for gross product bookings versus services and maintenance, should product for instance grow more quickly than the total rate of increase? Also on the product side related to bookings in 2003 the Astro upgrade was of course a significant component of your incremental bookings for the year. We have calculated and I think you concur that Astro is about a fifth or more of your bookings this past year and given how much you have upgraded that curve will necessarily have to slow down in '04 so where will the bookings come from in '04 in terms of other product lines? More specific about where the several tens of millions of dollars of increase will come from on a booking product size?

Jay, this is Steve. I will answer the first question first. We expect the services orders to be roughly flat plus or minus 5%.

And on the products first I think Astro has actually quite a bit of life left in it because there are a lot of products around Astro that are doing very well. One of the things that is a result of moving to become a full line supplier is that we are moving from increasingly selling point tools to now selling the complete platform in this case the Galaxy platform. And so as Astro is really solidified its position we can use that to continue to grow around it with all the products that attach to it and that integrate with it. Simultaneously a couple of other area that are very promising. I highlighted specifically IP and DSM. They have seen high growth for us this past year and are looking promising ging forward because the need is growing rapidly and our position very strong. And I would be remiss to not mention the verification which is an area that has seen a dramatic change in terms of our leadership. There in the last year and a half, many of our investments have strongly come in line and we believe that Discovery verification platform will do very well in '04.

One last follow up for Steve. Since you reintroduced term which would drop three years ago will you be reintroducing factoring of any term licenses as major competitors would term still on occasion due and is your expected duration of the terms three years as it is for subscriptions?

No and yes. So no factoring and yes we expect the terms to average about three years.

Okay. Thanks.

Tha thank you very much. Next in queue is Garo Toomajanian.

Data quest has been predicting 15% revenue growth for the EDA industry if 2004 and sounds like from the work you have been doing looking at R&D growth expectations that that that number could be substantially less and wondering where you think the industry growth will be next year and how Synopsys might fare relative to the rest of the group.

In the industry growth rate is higher that is great. I think we remain conservative in how we plan the future based on a lot of first bottoms up analysis and analysis of where the customers are at. It is clear that with the uptick in expectation on semiconductor revenue growth semiconductor expenses will follow over time. And so the only question is how quickly. In the long-term is, I do believe that EDA growth will be higher than some of the R&D expenditures in semiconductors for all the reasons given above. If that happens earlier, you know, all the better.

Okay. And one thing that I have been wondering about is how much hiring at customers could be a factor for increasing expenditures on EDA? I have heard that there is a number of customers domestically that are selectively hiring back engineers and I would expect that maybe in Asia there might be additional growth. Is that another opportunity area for EDA and you guys.

Definitely. Durn the downturn which for our customers was massive people have done severe cuts to the employment base. In many cases over cutting a little bit. Hence, some of the strong earnings releases that you see from these customers. Now, they're realizing that they have to spruce up the engineering teams and are trying to either hire or sign up service businesses or somehow try to accelerate things a different way and so I do think that we will see a bit of an upturn. Some of that upturn will be in geographies that are growing newly so clearly India, China and in general the far east is growing quite rap idly and we are well positioned in these geographies.

And your pricing would be the same or more than it is domestically is that right?

Most of the companies that we deal with that really matter are global companies any way and so they have long had work forces in these geographies and have long also been able to negotiate pretty good deals with us because they would be customers and I don't think that that would change massively. Clearly in the new geographies the small companies are careful with the spending because they don't have that much money and we make sure that we have appropriate deal with them. But in general the big business is all done with big companies.

Thanks.

You're welcome.

For you, Steve, I think one thing that I'm not clear on is why a customer would choose a term license over one of the TDLs or subscription license.

Term license as compared to a TSL is more flexible in that the customer is only buying maintenance a year at a time and they can actually buy more technology upfront and get it runed and pay for the mantenace annually thereafter.

So sounds like their total cash is there cash outlay less? Kind of how that works?

In general we think the cash outlay over time will not be less. It will be the same and actually we think the cash flow will be roughly the same because negotiate essentially the same payments on terms that are recognized rateably. On terms recognized up front we have payment terms that represent same as our perpetual licenses.

Okay.

But on those customers like the flexibility of a term that they don't get from a perpetual license. It has attributes that are appealing to some section sections of current buyers of perpetual and subscription licenses.

Am I correct in that the current subscription licenses do have the ability for the customers to mix products meaning for new technology and buyers with the term licenses would not have that option.

Buyers would term licenses would not have access to future technology?

And then lastly on the this issue I guess how much cheaper is an equivalent TBL to a perpetual that somebody might have bought today.

A TBL versus the perpetual?

Right,.

In general the pricing formula is worked out so that the crossover point is some where between the second term of a three year renewal but in any given customer a lot depends on the specific discounts negotiated with the customer. In general the buying price for a shorter term license is a little bit lower than for a perpetual.

Okay. Does that mean that your total bookings as you look forward might have been higher if you had stuck with a perpetual model instead of adding the term license component.

I don't think so. We think that the appeal of perpetuals has declined with customers over time. They're just not planning that perpetual time horizon any more. We had big renewals out of Japan and that is a place that people were willing to buy perpetuals but outside of Japan and selected other companies a lot lower level of Japan for perpetuals.

And with the new model the current business is going to be stepped up.

For us going to 90% renewable business is a great step forward.

Great, thank you very much.

Okay.

Next in queue is Sumit Dhanda with Banc of America securities. Please go ahead.

A couple of questions for you. First off, the year-over-year decline in revenues that you are forecasting so your new forecast of 1.2 to 1.25, is that basically being driven by the skew of orders for next year because if you sum it all up there is no real significant difference between the upfront recognition prior to this call versus what it was following the call. Am I reading this correctly?

Yeah, so to a large extent the quarterization has a lot to do with the revenue results for '04. There are a couple other factors. The biggest thing you will see is maintenance revenue will decline from '03 to '04.

If you were to try to break out your growth from a product bookings perspective year-over-year '04 versus '03 what would that order guidance look like?

Yeah, I don't think we're going to give guidance on products versus services in answer to Jay's question my response was you would expect services orders of roughly flattish from '03 to '04 and then obviously products the rest.

Okay. Also, could you tell us what the organic growth if the business was from an orders perspective the fourth quarter of 2003 2003 versus the equivalent quarter last year?

I'm sorry fourth quarter of 2003 the organic?

The organic.

Orders were slightly down from Q4 '02 to Q4 '03. But, I'm not sure if that is your question on a quarter comparison basis, yes.

On a quarterly comparison basis.

A little bit down.

And could you quantify there, was the decline driven by decline in product bookings or more by services bookings?

Roughly the same. Actually, a little more in product.

Okay. Great, thank you.

Okay.

And thank you very much, Mr. Dhanda. And next in queue we go to the line of Raj Seth with S.G. Cowen. Please go ahead.

Thanks very much. Steve a quick follow up on the discussion on term licenses so I'm clear. If you're shifting from perpetual to term and term is sold at a discount to the equivalent perpetual and I acknowledge what you said about sort of the lifetime value assuming some renewals, isn't if there is a fixed demand for a number of seats out there, doesn't -- doesn't that necessarily mean that your bookings expectations because of that shift per the Garo question earlier are lower or are you suggesting that the lower entry fee, if you will, and the natural elasticity of the market just means people buy more seats.

People buy more seats. There is not a fixed demand for technology. Budgets have been the constraining element.

Can you talk a little bit about your cash expectations in 2004. You have give and lot of guidance and still a little hard to model given the shift in terms. Talk a little bit about cash flow.

Well, yeah, we have given a guidance and I think I will probably take details offline. In general the cash flow out of an upfront term license is the same as what you would get out of the perpetual. The cash flow you would expect out of a term license that is taken over time we expect to pretty much mirror what we get on subscription licenses but actually probably even a little bit ahead of those.

I guess the question is in 2004 you recognized some revenue for which you have taken cash upfront already both in '03 and in '02 and the terms have shifted towards more quarterly recognition and I am just wondering how big an effect that is?

Yeah, I mean it is -- I have given the number. It is hard to guage specifically what a effect is. Payment terms are I mean of course the cash flow is sensitive to payment terms and we think we modeled based on Q4 which was the worst so to speak payment terms quarter for the year so we're confident with the guidance we have given. If you want to go into details why don't we take it offline.

We can take it off line. And Aart can you take a little bit about what you are seeing from the two major competitors especially in the implementation space where you have asserted you have gained a lot of share I suppose some of that is on the back of the strength in the avanty upgrades what do you see from Magma that and Cadence at this point?

Well, so in place in route that is clearly a hotly contested area and the three players are Synopsys, Cadence and Magma. We see a bit more of magma than cadence. The good news I think is that over the last year we see our market share to be already at about 50% which is significantly more than when we did the avanty acquisition and in that sense we are making good pro guess. But just as importantly is that since the acquisition, we have now been able to really align the R&D teams and that means that there is a stream of new releases that is coming out with steadily adding more capabilities. The other observation I would have is that more and more it is not just a point tool game any more. It is more and more place and routes being one of the anchors are an over all design platform and in this case that is Galaxy and that is strong connections or integration with sin they sis and sign off timing and tests and DSM capabilities and that resonates really well with our customers. Although we don't discount at all the other competitors we think that we are well poised now that things are strongly aligned.

All right, thanks. And when should we expect the result of this R&D efforts you talked about? I mean up 'til this point you have got better data base integration and better integration but fundamentally I guess one could argue that the capability is similar to what customers had both prior to the merger sounds like you are now taking the next step. When do we see these products?

These products are already partially getting into customers hands as we speak. In the last four or five months we have had now a sucsession of releases that have added capabilities, improve the capacity improved quality and improved timing correlation and so that stream has already started is and so if you look at what a customer would like to have a actually as quickly as possible many evolutionary changes because that is the lowest risk highest return and I think we definitely entered that flow now.

Thank you.

You're welcome.

Thank you very much. Next in queue is Dennis Wassung with Adams, Harkness and Hill. Please go ahead.

A quick question on the design for manufacturing front you gave some details in your initial conversation about largest product booking ever for a single product and just wondering if you could talk a little bit more about what you are seeing in that marketplace? Is it predominantly one part of the design for manufacturing peak, you talked about mass synthesis. OPC and base shifting coming alive here? I guess what I'm trying to get at is where is the business coming from, new narical avanfy technology and what you are seeing there in.

Okay, well both OPC and PSM of a face mask falling on the mask synthesis category and we are doing well if both. OPC is the dominant so far and so much of that technology comes from the original avanty roots and is based on the hard work of a very, very strong team that has invested in this for many, many year years. Over all I would say that the big picture is really that manufacturing understanding and design understanding are becoming more and more linked. And that is precisely where we see our big advantage because we can connect this understanding into our design flow. So bottom line is I think we many of the key pieces. Be it in OPC, PSM, also in CAPS which is the last step that you do before the mask making and in all of these areas we are strongly the leader in that field.

Okay. Great, thank you very much.

And thank you, sir. Next in queue let's go to the line of [Rich Valera] with Needham and Company. Please go ahead.

Aart, if you could talk a little bit about what you are seeing with respect to FPG and how they might be gaining shares relative to ASIX design star trends and how does the EDA industry as a whole over come whatever transition there might be towards FPGAs.

Most of the money spent is clearly on the ASIX side and there is true for a long long time and not expected to change. Having said that there is no question that FPGAs and absolute design starts have done well. This is not a new trend and we expect that to continue. At the same time, FPG As are becoming much more complex and starting to require more sophisticated tools which bodes well for what we have done because we developed a product set that is capable of doing both ASIX and FPGAs. As a matter of fact, I think we see now a number of our customers that do sophisticated ASIX using FPGAs as fast prototyping solutions and that is an interesting opportunity for us.

For you, Steve, Steve when you mentioned flat services bookings year-over-year are you talking about services per the line item on the income statement which really includes perpetual maintenance and services or just the services per se.

I was talking about services per the line on the income statement. You don't see the services orders on the income statement but my comment related to orders for those services which includes maintenance.

Great, thank you.

And thank you very much, Mr. Valera. Next in queue is [Rohit Pandey] of Credit Suisse First Boston, please go ahead.

A breakup between term and subscription going forward.

Between term and subscription 90% renewable but that is term plus subscription. I think that the thing so focus on we said 75% of the licenses would be revenue recognized over time. Which would be the sub vip objections plus that portion of term that gets recognized over time. Of that over 90% is subscription types so the term component there is relatively small.

And give us the historical quarterly bookings for this year?

No. I don't think I will give those, thanks.

And the question for Aart. What do you think is the long-term solution for the DSM strategy? Make sense to solve the problem at the place in doubt or at the higher level or make sense to solve the problem at the DBS level?

What what is the second at at the what level?

At the DBS level.

DBS?

GDF.

I phone line is a little bad here is. There is no question that all the manufacturing issues need to be at multiple levels in the design flee in some cases starting at the sin they sis level looking at what one picks in the library in the IP in the place in route and already today most people don't know that we have quite a substantial number of steps that we take specifically to improve design for manufacturing meaning specifically to improve yields and then of course when you talk at the GDF level you are talking primarily at all the steps one takes to improve the mask making process so the good news is we are involved in literally every single one of them. I would be stronger and I think we are leaders in most of these steps and so this is a very complex exciting field that I think we'll see really good growth.

Thank you.

You're welcome.

And did you have any follow up questions?

No, thank you.

Thank you very much. Ladies and gentlemen, we are at the five minute mark remaining in the conference and we will be accommodating the questions today. Next in queue, we go to Arnab Chanda what Lehman Brothers. Please go ahead.

A couple of questions. First of all, clarify, I think did you said that bookings were down for the quarter year-over-year? If you compared fourth quarter of '03 and '02.

I said Q4 '03 over Q4 '02 was down a bit. Q4 '02 was the biggest bookings in Synopsys history at least until Q2 of this year. It was a respectable quarter and right on plan.

One last question. You know, when you talk a lot if you look in your -- you know when you talk about your services bookings being flat or the product bookings, some of some part of your bookings take maintenance as part of the license you know bookings and some do not. How would we -- how would we separate that? Do we assume the part that is pure services and not maintenance that is flat or how are you talking about that?

My comment, first of all maintenance is bundled with subscription licenses. My comment about services bookings being down was excluding any portion of maintenance that is bundled with a subscription. We consider that part of the product bookings. Beyond, that I mean I don't have inn easy way to separate things for you. We can pick it up off line and think about it.

Next to the line of Jennifer Jordan with Wells Fargo. Please go ahead.

I have a couple of questions. You mentioned that you believed that the DFM market is $170 million and can you go over again where you think that grows and which product lines within the products you're looking at for the strongest growth?

Okay. Well, one of the areas that clearly is strong today is OPC, optical proximity correction and there much of the growth will come from the fact that with the smaller geometries not only do you need to do much more OPC but much more onmore layers than before and even better or for worse depending whose side you are on more layers being used in the small geometries. Other areas one is for the tool set its that takes the GDS2 and breaks it into small pieces and then the TCAT arena which simulates the process of building a chip and then there is a variety of other RET techniques around this, PSM being one of them but a whole bunch of these and all the techniques to verify that the mass are correct and verify that the implementation is correct.

All right.

So at danger of sounding very complex here, I would like to summarize if more by saying manufacturing and design are being connected. They are no longer in independent. That the intersection is mask synthesis and that is the area where we see the highest growth.

What I was trying to get at you is $170 million there the in the pie right now and how much do you think is OPC related and how fast do you think that will grow? CATs is probably 30 million now. How fast could that renew if you do an upgrade cycle there?

Well, my guess would be OPC is somewhere around $80 million or so in total. Maybe a little more than that.

$80 million?

Yeah.

Okay. And then for the phase shift masking stuff, what do you think that is?

Well, give than we are the only ones that really do phase shift masking I don't want to release those numbers that the point in time.

Okay.

This is probably a good topic to come visit us at investor day because we will have people that know a lot about DFM and it is one of the topics that we want to talk about and so then we can probably give you a little better breakout of the market segments rather than me winging it here on the phone.

Okay, great, thanks, Aart.

You're welcome.

Thank you very much, Ms. Jordan. Ladies and gentlemen, we would like to thank you for the strong interest shown in the call today. However, with time now for one final question a follow up from Sumit Dhanda from Banc of America Securities.

My question has been answered.

With that, Mr. De Gues and Mr. Shevick, I will turn the call back to you. There are no further questions.

We appreciate your your attendance to the call and as usual Steve and I will be available afterwards and hopefully we will see many of you at the investor day meeting in New York. Thank you.

Ladies and gentlemen, your host is making today's conference available for digitised replay for 12 days starting at December 3rd through December 15th. Access by dialing 800-475-6701. At the voice prompter the conference, dial 705786. Con con concludes the call. Thank you for your participation as well as for usings AT&T executive teleconference service. You may now disconnect.