新思科技 (SNPS) 2004 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Synopsys second quarter fiscal year 2004 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 Synopsys' quarterly report on Form 10-A, for it's first quarter of fiscal 2004, which is on file with the Securities and Exchange Commission, and in Synopsys' release containing it's second quarter financial results which is posted on it's website? In addition, Synopsys would like to advise you that 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 this call to GAAP financial measures, is now available on the Company's Website. The Web address for such information and for earnings release is http://www.Synopsys.com/corporate/invest/invest.html.

At this time, 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 over our finance results and guidance in a few minutes.

I'm very pleased to report a solid April quarter with revenues and earnings above first call consensus and a book to bill ratio above 1.

Let me start with three general observations. Recently the overall spending environment for our solutions has improved. Customers are moving more aggressively to smaller geometries and we are unveiling some remarkable new technology that cements are positioned as the industry leader. These developments bode well for the rest of the year.

I'm encouraged by a variety of data points during the quarter, all of which suggest that the second half calendar year spending recovery is on track. During Q2 we saw spending improvements in Europe, Japan and Asia-Pac. We entered into two large multi-year agreements for the full Synopsis design platform with major European semiconductor makers. We also had broad success in Japan and Asia-Pac, led by consumer companies reporting very strong volume growth. In particular, Japan which had under invested in design productivity software for the last several years, is now rebounding as demand picks up.

Spending in North America lagged other regions in Q2 mostly due to the timing of the renewals, but utilization of installed seeds grew. In general, to adapt to the post downturn environment our customers are looking for the ways to stabilize the cost of getting chips to market profitably. Some are expanding into lower cost labor markets, but more importantly for us, customers looking at new approaches to increase their productivity while simultaneously moving faster to smaller geometries. That has begun to translate into stronger interest in our IT cores, our design for manufacturing product and our design and consulting services. We're happy to report that our services bookings grew over 90% in the first half of this year, compared to the prior year, while consulting utilization rates continued at full capacity.

In addition, we have over a year's worth of consulting revenue and backlog. Indeed, we consider the pickup in our design services a leading indicator for better spending going forward.

Our customers definitely have a higher sense of urgency to deliver new products as their end markets have picked up but many of them also over trimmed their design resources during the downturn so they are now stretched to handle the design pipeline.

Equally important, at the smaller geometries, quite a few customers are finding it challenging to optimize designs for area and timing and tests and power and yield and time to market and time to volume all at the same time. As a result, they are turning to Synopsys for help.

Give the technical problems and cost challenges that customers face, I'm often asked whether they will continue to migrate to smaller geometries. The answer is absolutely, yes. Here is why.

Consumer products on one hand greatly leverage complexity as they integrate computation, communications, storage and so on, in a tight silicon package, but on the other hand high volume and mobility requirements pose incredible challenges for yield and power management. With the market windows for consumer products so narrow who ever hits their target first wins. ON a recent industry panel a representative from Phillips commented that the computational requirements of today's consumer electronics are "forcing them to move to the next geometry node in order to stay competitive whether they like it or not. Synopsis' most recent North American users group survey in March affirmed this trend, 21% of our attendees currently design at 90-nanometer, up from just 12% a year-ago.

Now, we have heard many bold and rather vague claims from others in the industry when it comes to 90-nanometer design. Synopsys has unparalleled visibility into design trends, because we are the de facto signoff standard used on virtually all chip designs. We have been tracking design starts for some time and currently we tally 194 designs at 90-nanometer. Synopsys backend tools account for two thirds of all 90-nanometer tape outs to day. Just as one example, in Q2 we announced that Toshiba taped out multiple 90-nanometer chips using our Galaxy design software. Today we are already tracking 24 designs at 65-nanometers. Our physical design tools were used exclusively on the first and only production chip that taped out at that geometry.

Just to be clear, we are leading the charge of the world's most advanced chip designs. Our R&D engine is the key reason for our success in this area. In fact, we are rolling out dramatic new advances in our product portfolio as we speak. Let me bring you up to date starting with Galaxy our design platform.

On Monday, we announced Galaxy 2004. It the most important product release in recent Synopsys history. It takes full advantage of our unique sign off position and heads the major 90 and 65-nanometer challenges of low power and yield head on. Galaxy 2004 improves run time, capacity and yield features by 2X. All tools in the Galaxy platform use common area, timing, test, power, and yield metrics supported by common constraints, libraries, scripts and an open database and are fully collated with our industry standard sign off tools. Many of these capabilities were previously impossible and their integration into one robust solution accelerates time to viable silicon.

Now I would like to focus on the crucial topic of yield and low power.

For 130-, 90-, and 65-nanometer design within Galaxy 2004, we have a vast array of new yield improvement techniques.

Let me just list a few that are in Astro. Automatic timing driven wire spreading. Automate via optimization and redundant via insertion without increasing area or congestion. Automatic timing driven dummy metal fill insertion. To a customer, these are crucial capabilities. In short, we are infusing manufacturing awareness into our design tools. Although the reports are still anecdotal we have already heard from our customers that the yields achieved with our tools are superior to those of designs done with the competitions.

The other major highlight of Galaxy 2004 is low power design a topic which will get a lot of attention at this year's design automation conference.

As you may know, we are witnessing the collision of two major trends. Customers desire for longer battery life when a device is turned on, as well as reduced power leakage when it is in standby mode. At Back in June, Synopsys will demonstrate the most advanced power management offering on the market. Galaxy 2004 addresses dynamic power, leakage power, power planning and distribution and power related reliability analysis. Our solution optimizes power while simultaneously meeting timing, area, and disability requirements. It is also the only offering developed with and supported by ARM intelligent energy management solution for on the fly power management. Customers recognize our strength in this area and are beginning to come to us after competitive tools were incapable of meeting their power targets at the fab.

For low power design, Synopsys is the only sure choice. In Q2 our core design products did particularly well. Design [inaudible] had an excellent quarter and exceeded plans growing bookings 77% sequentially and 16% above Q4 levels. [inaudible] bookings grew 148% sequentially and 11% over its Q4 run rate. We are displacing competitors and are selling new [inaudible] into the marketplace. As a result Astro's installed base continues to grow and there are no instances of Astro being displaced in Q2. We expect both [inaudible] and Astro to show positive growth in 2004.

Both of our industry standard sign off tools had extremely strong results in the quarter. PrimeTime, the sign off standard for static timing, grew in orders by 169% sequentially and 69% over its Q4 levels. Star CXT, the de facto standard for instruction sign off and a critical piece of both our Galaxy design and Discovery AMF solutions grew 241% sequentially and exceeded Q4 levels by 61%. In Q2 we launched design for power FPGA, a highend FPGA physical solution for easy ASIC prototyping. Based on surveys from recent Synopsis user group conferences, 51% of ASIC designers worldwide prototype their designs with FPGAs, up from 40% in 2002. What makes our solution especially attractive is that designers can use exactly the same constraints, scripts and design directives for FPGA prototypes as they do for the ASIC designs, thus reducing both design time and risk of errors. In addition VSC FPGA is getting the best timing of any product on the market. As a result VSC FPGA is already seeing high adoption rates with 24 new logos just in Q2.

Finally, I would like to highlight a new release that is generating a lot of [inaudible] excitement. Our new design planner Jupiter XT. After some earlier challenges in this area, we are now seeing demonstratable advantages over the established competition. Jupiter XT now features a highly predictive design planning flow, which is enabled by using embedded placements, routing, timing, and power management technologies from PC, Astro, and Prime Time. This helps avoid routing congestion later in the design, thus greatly reducing the risk of schedule slips. In addition we have some great new capabilities such as a very powerful macro-placement, built in power plant synthesis and power network analysis features.

With Jupiter XT, Synopsys will reclaim design planning leadership. Another strength of Galaxy is its ties to design for manufacturing or DFM for short. We have many, many advantages in this area. Our OPC, optical proximity correction product, Proteus, has the best scalability, flexibility, and quality of results in the industry. Used broadly for90-nanometer, it is already proven for 65-nanometer as well. Our market performance has been strong and we generate significantly more sales in OPC than our nearest competitor. As a reminder the DFM revenue that we disclose every quarter, excludes physical verification, which is historically considered part of the design flow.

The benefits from last years numerical acquisition are becoming visible as well. As we integrate the [inaudible] fracturing software with our OPC tools, we directly impact the complexity of masks and thus the cost, risk of errors and the writing time. The first fruits of that integration can be seen in fracture friendly OPC, which went into beta in Q2 and is showing very positive results.

In Q2, we also made significant advances to your civil product, creating a new category of DFM software for verification. Civil, which stands for silicon versus layout, is a verification technology that ensures integrity of masks. We believe that Civil for DFM verification will became a sign off requirement in the future, and a critical element of the DFM platform.

A word on management. [inaudible], who headed new ventures, has left to become CEO of a [inaudible] semiconductor company and we wish him well. Chi-Foon Chan, our President and COO, will temporarily manage this area, to accelerate its excellent growth opportunities.

Moving on to verification. Our Discovery platform has seen major improvements. We are now shipping VCS 7.1, which greatly expands support of VERA and makes test bench automation native to VCS. The result is 2-4X better overall run time. Currently only 25% of the addressable market uses test bench software. With these native capabilities we believe we can increase this number to over 50%. In VCS 7.1 we lead the industry in support for system Verilog, which continues to gain momentum in the marketplace. On the analog mixed signal side, Discovery AMF, which was introduced last fall, is growing well, with over 70 logos. Two components of Discovery AMF, specifically Nano Sim and H-spice, had extremely good results in Q2. Nano Sim, in particular, saw orders grow 293% sequentially and 75% over Q4 levels. Nano Sim is also helping Synopsys break into new end markets such as the medical device industry. From pacemakers to hearing aids these products require sophisticated AMF and low power tools as they must be optimized for optimized for extremely long battery life. This area can become more significant for us as chips in health care become more intertwined.

H-spice also showed healthy growth in the quarter up 176% sequentially and 58% over Q4 levels. Stay tuned for extra ordinary performance improvements to be announced in June.

Finally, our IP business did well again this quarter. IP is a competitive differentiator between us and other EDA companies. During the quarter we continued our progress in becoming the house provider of IP, signing four multimillion dollar IP agreements, including contracts with Samsung and two other top ten semiconductor companies. We are aggressively expanding our IP offerings as shown by a few examples from this quarter.

During the quarter we successfully integrated the products and people of Accelerant Networks into our IP operation. This gives us the industry most advanced 6 and 10 gigabit per second [inaudible], an accelerated road map for our [inaudible] business and new business opportunities. We saw the first customer tape out of our unique combined base [inaudible] and fi-USB high-speed on the go course. We saw the first customer tape out of our new PCI express base [inaudible]. We expect the new PCI express standard to see very rapid adoption for chip to chip communications.

Regarding MoSys given the legal situation you will understand that we cannot say much beyond a few minimal comments. We exercised our right to terminate our tender offer in a timely manner as a number of requirements spelled out in the merger agreement were not met. We remain open to the possibility of entering the embedded memory IP space if the right opportunity presents itself.

Overall our IP business is strong. With the major et of customers now working at 130 nanometers, the need for high quality IP [inaudible] is growing. In this field our reputation is second to none.

In conclusion, we are encouraged by the improvements in the overall spending environments, by our customers increased reliance on us as they move to small geometry, and by the release of new Synopsys technology that cements our position as a technology and industry leader.

With that, let me pass to to Steve Shevick who will give you an update from the financial perspective.

Thanks Aart, and good afternoon.

As usual during this call I will discuss certain non-GAAP measures of our financial performance. These measures exclude amortization of intangibles asset and other merger related [inaudible], including, in this quarter, the $10 million termination fee paid to Monolithic Systems and disbursements relating to our work force realignment in Q1. Reconciliation of non-GAAP results to GAAP results appear in our press release and financial supplement. For your convenience a copy of our remarks and all the numbers I discuss will be posted on our website.

Now, for the numbers. Q2 was a solid quarter for Synopsys. Orders were up strongly from Q1 and we are approaching the second half of the year with increased confidence. Revenue for the second quarter was $295 million, within our guidance range of 285 to $300 million. 72% of revenue came off of backlog. Approximately 26% of revenue came from up front licenses 55% from time based licenses and 19% from maintenance and consulting.

Revenue increased approximately 1% from Q2 of FY '03 due to growth in time based license revenue, offset by a decline in up front license revenue and services revenue. Time base the license revenue increased by approximately $15 million to $163 million. up front license revenue decreased by approximately $6 million to $76 million. Services revenue decreased by $6 million to $56 million. Sequentially revenue grew by 3% from Q1 of fiscal year 2004. Revenue from up front licenses increased by 27% from Q1 to Q2 consistent with the significantly higher level of orders in Q2 then Q1. Revenue from time based licenses dropped by 4% and revenue from services increased by 1%. Revenue from time based licenses declined due to a relatively low level of subscription licenses sold in Q1 and because we have not booked any time based due and payable term licenses this fiscal year. One customer accounted for more than 10% of revenue in the quarter.

Geographically, Japan and Asia-Pacific were particularly strong in revenue. North America contributed 53% of revenue, Japan contributed 20% of revenue, Europe contributed 14% of revenue, and Asia-Pac contributed 13% of revenue equaling its record level of contribution in Q1. 84% of revenue came from our core EDA products and 13% of revenue came from our emerging businesses, with 3% coming from services.

Turning to orders. Book to bill was between 1 and 1.1. Approximately 76% of software orders were booked as renewable licenses and 24% as perpetual licenses. The perpetual license number is not a surprise given the strong orders contribution from Japan and Asia-Pacific this quarter. We except the percentage of perpetuals to trend downward over the remainder of the year. Maintenance orders were strong during the quarter with a lower attrition rate than in past quarters and some customers going back on maintenance. During the quarter, up front licenses represented 42% of license order, including 25 to 35 million in license orders that will turn to revenue in Q3. Excluding these up front orders our up front license percentage would have been within our target range of 25-35%. We expect up front orders for the year also to be 30% of license orders plus or minus 5%. The average length of our renewable license -- our renewable customer license commitments in Q2 was 3.7 years and was particularly influenced by two large transactions. One customer accounted for more than 10% of orders in the quarter.

Aggregate non-GAAP operating expenses for the first quarter were $213 million. Slightly below the bottom of our target range of 214 to 221 million. This was principally due to lower employee costs and bad debt expense. Operating expenses included almost $2 million in legal and other expenses relating to the MoSys transaction.

Our non-GAAP operating margin for the quarter was 28%. The long-term target continues to be 30%.

Other income for Q2 was 900,000. Within our target range of negative 1 million to positive 2 million.

Our non-GAAP tax rate was 31% consistent with Q1.

Weighted average shares outstanding for the quarter was 162 million shares within our target range of 160 to 168 million shares. Non-GAAP earnings 35 cents per share at the top of our guidance range of 31 to 35 cents per share and 2 cents above the first call consensus.

Q2 was a very good quarter for cash flow with non-GAAP free cash flow of 97 million. GAAP cash flow from operations was 90 million including net tax benefit of approximately 17 million. Cap Ex was $9 million for the quarter. The MoSys termination fee was $10 million and expenses and disbursements relating to acquisitions and our Q1 work force alignment was $6 million. Cash and short term investments were 613 million at the end of Q2, down approximately 5 million from the end of Q1, and largely reflecting the net effect of share repurchases and acquisitions offset by option exercise proceeds.

During the quarter we established a resolving line of credit for up to $250 million. Currently there is no debt outstanding under the revolver.

During we quarter we purchased approximately 2.2 million shares of Synopsys stock at an average price of $35.59 per share. As of today, approximately 262 million remains in our repurchase program. We expect to be in the market this quarter.

Q2 accounts receivable totaled $221 million, up approximately 14% from last quarter and DSO was 68 days up from 62 days at the end of Q1, reflecting the strong rebound in orders during the quarter. Deferred revenue at the end of the quarter was $452 million, up $18 million from the end of Q1. Aggregate backlog was up slightly from the January quarter and we expect it to grow substantially for the year. For the third quarter we expected over 75% of our target revenue will come from backlog. Payment terms were generally consistent with the average of the past four quarters.

Head count was 4,249 at the end of the quarter, up slightly from 4,206 at the end of Q1, primarily reflecting employees added in acquisitions, expansion of our consulting capacity, and targeted hiring in other parts of the business. We expect to exit the year with head count of 4,500.

Before I provide our targets for Q3 and FY 'O4 let me briefly comment on MoSys. As you know, we terminated the MoSys transaction and paid a $10 million termination fee on April 16th. MoSys has sued us in Delaware seeking to force closure of the acquisition or alternatively, damages. The trial is scheduled to begin on July 6th. Given that this is active litigation we cannot provide any comment or additional color beyond what is already in the filed court documents; however,t we firmly believe that we terminated the transaction validly and in good faith and we continue to move aggressively with our IT strategy. For financial reporting purposes all expenses relating to the MoSys transaction, are including the termination fee, legal, accounting, and other expenses are included in the G&A line in our GAAP financial statements. Only the termination fee has been excluded from our calculations of non-GAAP earnings expenses and free cash flow.

Turning now to our expectations for Q3 and fiscal 2004. Our third quarter targets are as follows, revenue between 300 million and 320 million. Total non-GAAP expenses between 220 million and 230 million. Other I&E between negative 2 million and positive 1 million. Non-GAAP tax rate of 31%. Outstanding shares between 158 million and 166 million and non-GAAP earnings between 35 cents per share and 40 cents per share. We expect TBL to account for 70% of the license orders and up front licenses to account for 30% of license orders, and each case plus or minus five percentage points. And we expect TBLs to contribute 50-55% of total revenue, up front licenses to contribute 28-33% of total revenue and services to contribute 15-20% of total revenue.

Our targets for the full year are as follows, orders of 1.4 billion with the quarterly distribution over the rest of the year as follows, 20-25% of the year's order in the third quarter and 42-47% in the fourth quarter. We expect revenue between 1.2 billion and 1.23 billion, with a quarterly distribution of 24-27% of the year's revenue in the third quarter and 25-30% in the fourth quarter. We expect non-GAAP operating margin between 27 and 29%, non-GAAP tax rate of 31%, non-GAAP earnings per share between 137 and 147, versus 130 to 140 in our previous guidance. This change in our guidance range is attributable principally to eliminating the dilutive impact of the MoSys transaction on the rest of the year offset by expected legal expenses. We continue to expect non-GAAP pre-cash flow in excess of $1.80 per share assuming achievement of our orders target and no change in the payment terms and collection trend. We expect TBLs to account for 70% of license orders and up front licenses to account for 30% of license order, in each case plus or minus 5 percentage points. We expect TBLs to contribute 54-59% of of total revenue, up front license revenue to contribute 23-28% of total revenue, and services to contribute 15-20% of total revenue.

In summary, we are pleased with our performance in the second quarter. The customer environment continued its gradual improvement and we enjoyed orders, revenue, earnings and cash flow that were all on track. At the same time we began rolling out exciting new technology and are gaining momentum in a number of key areas. With our success in the second quarter we are attacking from a base of financial and technological strength and enter the second half with a growing sense of confidence in our position and our ability to hit our targets.

Operator, we will now open for questions.

Thank you sir. [Operator Instructions] And one moment please for the first question. And our first question comes from the lines of Garo Toomajanian with RBC Capital Markets. Please go ahead.

Thank you. Steve, can you go over again the percentage of orders and percentage of revenue from up front and time based licenses?

Sure. I mean it is on the website. Or I could give it to you afterwards if you like.

Okay it is on the website.

Rather than go through it on the call, it is probably easier if you look it up on the website or we talk about it.

Okay, and you had said that the percentage of up front orders was higher than expected because of something going on in Q3. Can you go over that again?

What we said was that the up front taken in the quarter was 40% of license or 42% of license orders, but there is 25-35 million that carries over in terms of revenue in Q3. So if you take those out we were within the range that we set for the quarter.

Okay. It sounds like your confidence is up in second half performance. Can you maybe anecdotally talk about progress that you have seen on some of these Q4 deals in last couple of months?

The first thing that we observe is that in aggregate our customers are designing more aggressively. And it is very clear that now that products are going to the market they only have to be concerned about the product pipeline and that includes being competitive and includes going to smaller geometries. Now we've always are argued that design is getting harder, therefore they need more help, they need more support and we are suddenly being called in in in a lot of situations and that bodes well for us, especially at the very moment where we're rolling out just a plethora of new strong technologies.

Sounds like customers are asking for services too and getting some help to get things done. Are you ramping up that organization or is your plan really not to necessarily grow that too much?

We have ramped it up. We will probably ramp it up further, because there is a lot of -- the services that we do there that are very, very helpful to our customers to do their job. And that in the process help us promote our products. And so I think it is very synergistic with the rest of the company.

Thanks Aart. And lastly, Steve, in the past you mentioned $1.90 EPS number for 2005. Any reason to expect that to be above or below that number now?

Yeah, Garo, at this point we are going to give our update on 2005 on the Q4 earnings call, which is when we normally give guidance for the next full year and, of course, 2005 completely dependent, at this point, on what we book in the last half of the year plus what the forecast is for '05. So, I don't think it makes sense to give any more model based numbers, but would prefer to wait until we have an actual forecast, we give something more concrete.

Okay. Thanks very much.

Thank you for your questions, sir. Our next question comes from the line of Sumit Dhanda with Banc of America Securities. Please go ahead.

Okay. Good afternoon, guys. The question I had for you, Aart, perhaps, you're talking about increased logos for 65-nanometer. Does the -- you know, does Intel talk about probably higher capital expenditures spending for that node sort of fortify your view in terms of an accelerated migration to that and how do you weigh that against, you know, sort of the implicit or the implications of Intel cancelling some of its advanced processor designs going forward? Does that say anything about [inaudible] and the shift to smaller line width?

Well, I'll be reluctant to comment about Intel specifically given that we know so much about many of their products but in aggregate there is no question that the most aggressive people are investing in 65-nanometer right now because they have to and they want to and because they can. And so from that perspective I expect that we will see more tape outs in 65-nanometer in the next 12-24 months. Having said that, I think the major move right now is really on 90-nanometer for the advanced design because there the sense is hey, it is not looking as bad as it was for moving to 130 and people are actually reporting already reasonably good yield there and therefore, if you can do the design you will certainly try to do that. And then the third wave that is going on in parallel is really the biggest wave, which is 180 to 130 and that is a across-the-board now. Many, many companies I would say we passed the 50% point of -- of certainly our users being at 130 or below.

Would you say is it fair to say that despite the hard costs associated with 90-nanometers you don't expect that transition to be, you know, perhaps as slow as 130 was, of course, for a different set of reasons?

Remember, 130 did have a problem.

Right.

It was the introduction of copper and [inaudible], in my own opinion is that overall it slowed down that whole transition by I would say 9 to, potentially even, 15 months in aggregate. But in the process a lot of issues were resolved then that made 90-nanometer easier to get to. Second comment is no matter what, the most advanced technologies are dedicated for the people doing the highest volume, highest performance chips. Anybody else should haven't any business designing there yet, but will follow soon thereafter if it's proven that yield is feasible and that the design techniques are on par.

A couple of quick ones. The environment, is it fair to say that you are you're distinctly more positive about this versus your last conference call or is it still just a very gradual recovery? And then if you could talk about what, in particular, you think drove outsized growth of Japan this quarter.

Well I think that the reason you feel -- see us to be more positive is that the trends that we have seen in the last 12 months is only piercing through. Which is customers are really selling. And suddenly there is pull in the product pipeline and with the pull comes both the anxiety and the urgency on the part of the user to say how quickly can I get the next chips out, how quickly can I come out with the next camera or TV model because the market is there. And I would say, from my perspective in the last three to six months, that is really the feeling changed that we perceived. In addition, I think that the new technologies are clicking in and with that comes the demand for products. Bottom line, yes.

And then Japan any reason for the outsized performance there.

Yes, I think there is a reason that -- actually multiple reasons. One is that Japan is very consumer product centric and consumer is clearly hot is driving technology, is seeing high volume, and, by the way, sees many new opportunities for semiconductor products. Secondly I do think that Japan, over now quite a number of years, did under invest, both in terms of its engineering strengths and spending in engineering flows and design flows and is now starting to catch up. And so both of those add up well for ADA.

So would it be fair to say then that, relative to the April quarter last year, where you saw the one off from Japan, this would probably be a little more sustainable in your opinion?

I think it is more sustainable. One year ago we happened to have the coincidence of many very large renewals, but I think what we are seeing right now is that -- I should use the right word, sustainability and that Japan is moving very rapidly to the smallest geometries you can think of.

Okay. Thank you.

You're welcome.

Thank you for your question and the next question comes from the line of Jay Vieeschhouwer with Merrill Lynch. Please go ahead.

Thanks. Good afternoon. Aart, I would like to start by re-asking a question from the last conference call about your product mix expectations and [inaudible] composition of bookings and how you get to the growth expectations for this year.. Is it still your expectation of high single digit products bookings growth for the year, in other words, somewhere between 75 and $100 million increment over last year? And can you talk about the -- the -- the component or rank the components in terms of product area that you think will most contribute to the growth? The presumption has been that Astro would not be as incremental this year as it was last year, but it sounds from your prepared remarks as though you are sounding,perhaps, somewhat more optimistic about Astro bookings ramp.

Okay. Well, in general we don't give out details bookings forecasts for obvious competitive reasons. However, I think your remarks do reflect reasonably well that we feel more strongly about products including our core product. And this is -- this is largely a result of what we see being the deliverables in 2004, which are very strong where our place in routes, our floor planning, our signoff technology and our synthesis, all have gone through major, major advances but most importantly are now awsomely well correlated and the reason I push on this word correlation is because that is the biggest risk reducer for our customers and we do expect that we may see strong orders growth out of these new versions.

On that front, with respect to the technology and the common engines and so forth, that was one of your principal objectives two years ago when you closed the Avanti deal so, notwithstanding improvement in these deliverables, are you, in fact, where you should have been, you had some changes in your release schedule last year for Galaxy, for example, did that have a cumulative effect that, even though you made improvements obviously with yesterday's announcement, you are not quite where you should have been today anyway?

Well actually I would go just the opposite, I think we are exactly where we should have been and if at all I think the effort to get complete alignment among the products did take longer than we had initially anticipated, but the benefits are much larger, too, and so at this point in time I think I sort of gave the laundry list of how everything is now correlated on timing and area and power and test and so on. That was a big effort, but on that effort we now have the opportunity, and actually are already delivering on optimization and convergence in the design flow, that is really opening the door for a lot of new innovation and much of that is now coming out ADAC and is visible, and I didn't even mention the things that we will be showing to people behind closed doors to our preferred customers. So the somewhat quiet tone, that we have had as a company, as we went into major integration innovation now, I think, we're telling you what we have done and I think the results are really great.

Just a couple of follow ups. Is it still your expectation Aart, as per the last conference call, that the major deals that you expect to close, particularly in the back half of the year, of course, would renew at least at par? In other words, the gross value of the contracts and the durations, would be at least as much as they were, such as the last time whether for capacity or added product or mix and so forth.

Bottom line is yes, each deal is complex of many different products, people shift their emphasis, they may shift their time and so on and so there is no two deals that have ever been the same. But the whole premise of our business obviously is to grow from deal to deal and given the technology that we have we -- we feel that we are absolutely on track to do that.

And lastly, someone asked earlier about Intel to ask another Intel related question, they announced a new design strategy and new approach towards implementation and they also showed a date, a prototype of a new internally developed system for design and verification. As they are your largest customer what do you think are the implications of their new design strategy and of their internal development approach?

Well, none of these things has any impact on how they buy things because they have, obviously, a big pipeline of many processors and many other chips in design and we have never really confirmed that they are even a customer, but it is sort of obvious that they are. And so the fact remains that design is moving forward rapidly. Intel is certainly a leadership company in terms of technology utilization and we love that because so are we.

Thank you.

Thank you for your question. Our next question comes from the line of Bill Frerichs with D.A. Davidson and Company. Please go ahead.

Good afternoon. Just to clarify on the product line up in floor planning does this incarnation of Jupiter replace floor plan compiler in the line-up?

Dave, the bottom line is yes, we have merged our previous efforts already awhile ago and really done major, major league surgery and improvements on what we had and added actually quite some strong innovation. And so we are very excited about the floor planner because we do consider it a crucial tool. Especially if it is linked well to the tools that follow. The challenge in design flow is that you do something and then further down the -- downstream other tools invalidate your work. The fact that it is strongly correlated using placement routing timing technology from our other products reduces that risk massively and thus allows people to have a better chance of meeting their schedules and that is why the floor planner is hot.

The question would then be would it be too much to expect that you would replace silicon perspectives in some accounts or is it just a very good thing that you have a floor planner that is optimized for your flow?

It is absolutely not too much to expect. We absolutely think it is a very competitive tool and that, especially, as complexity grows the need for the capabilities we have will be absolutely essential and we plan to go head to head with any competitor in this area.

Okay. Thank you.

You're welcome.

Thank you for your question. And, we have a question from the line of Raj Seth with S.G. Cowen. Please go ahead.

Thank you. Aart, I realize you don't want to give guidance Synopsys' guidance for '05, per Steve's earlier comments, but I'm curious, given the trends that you are seeing, the transitions to finer geometries, etc., many of things you talked about, what do you think the industry can grow in '05? And I guess I suppose from your comments you expect to outgrow the industry. What the industry growth be and then I have got a couple of follow-ups?

From a long-term perspective we are obviously committed to grow in the double digits and we think that the EDA industry, in general, will do well because, after now a big phase of investment in semiconductor technology, and you can see the applied materials and so on will do very well, as people layer in the capacity to live up to the market opportunities, it is clear that now the pool is going to be back to the pipeline of design and, I think that in general, one could argue that the investments in EDA in the last few years have been relatively low compared to the change of technology and, therefore, I think, EDA, overall, will do well quite well, and, I think, that we are sort of at the the beginning of the next cycle here.

So, you talk about double digits. If the semiconductor industry let's say grows 10% does that mean EDA grows 10% or do you think there is an opportunity over the next couple years to grow 15% or higher, and I wonder if you could also characterize what you see from your competitors? You're obviously excited about a lot of these new products. What do you see from Cadence, what do you see from Magma, are we in a situation where there is a number of different vendors that have platforms that work and can get the job done and therefore, there continues to be some pressure on pricing or is it your view that one of the vendors really pulls ahead and takes meaningful share in the next couple of years?

Okay, I think given the good potential outlook for our industry it is clear that everybody has great ambitions. I do think that some will pull ahead. I think we will be that some. And at the same time I also am well cognizant of the fact that there will be competition in the core arenas, but we have also very consciously grown what we call a bit broader silicon infrastructure perspective which includes DFM, it includes IT, and these are things that are highly leveraged around our core expertise. You hear some excitement in my voice because clearly many of the core tools that we worked on for a long time have grown in strength, but these other areas such as IP and DFM have done remarkably well so it is the compendium of all of that that will really allow us to pull ahead.

So, how would you, in that core area, handicap the two competitors I mention?

Well, you know, we compete with Magma primarily or only in the place and route area, so they are pointed player there. They have had the benefit of initially coming out at the very moment that we merged with Avanti so we are busy at that at the very time that I think that Cadence was not particularly strong, so that they have had somewhat of a free run. I think that honeymoon is now over. They have executed well, but, I think, things are changing here. On the Cadence side it is a -- a -- a -- a strong large company and it has a big installed base from a technology point of view I think we will give them a run for their money, too.

Thanks.

You're welcome.

Thank you for your question. The next question is from Richard Velara Needham & Company. Please go ahead.

Thank you. Art, I think you mentioned that, although orders were slow in North America that, I think, seed usage was up and presumably that there was indication of order strength to follow. Can you talk about how you measure the seed usage and give us any sort of quantification of maybe how much it was up over what time period?

It is a good question. It is actually a fairly difficult question because the seed utilization that we observe tends to be through our support engineers, many customers are, for good reasons a little shy in communicating exactly how much they use, because they feel that hampers the negotiation position. Nonetheless we do have a pretty good feel when they start to be getting close to where renewal is necessary in order to keep their shop running, and so we have never disclosed exact utilizations, but I can tell you that we have most definitely in the last 12 months seen that go up and I think that bodes well, again for our future.

Great. And on the -- in the new ventures slot that Chi-Foon Chan vacated Chi-Foon will be running temporarily. Have you engaged in a search to replace Chi-Foon Chan at this point?

Chi-Foon, right now, is taking the opportunity to look at the entire business. We often do that when there are management changes, because taking the time to do sort of a, what we call a deep dive in the business, is very, very useful to look at other opportunities that we could execute on better are there things that we want to change structurally, and so he will take a few weeks to decide exactly what we will do, will be internal or external, but we are certainly open to all of these possibility.

Great. Just one final one on the VCS I believe 7.1 release where you have got the embedded test bench automation, I think you mentioned that you wanted to expand that to the entire market for test bench -- up to 50% of the simulation market, which, if it was mostly you doing that would imply a gain of a simulation market share, is that -- am I reading that correctly?

You are reading it correctly. Obviously that is a great assignment for us. We do think that we have strong technology and we also believe that the test bench simulation combo is really valuable for the customers. And so we are getting that feedback from the customers, the adoption rate will be a function of how quickly we can deploy and work with them, but clearly there is market opportunity here.

Great, and just a follow-up on that. In terms of the -- you know, pretty much everyone who gets VCS 7.1 gets some test bench automation, so of for free. Do you have a sense of how many customers that get that are actually using it actively and might pay you more for some of the more advanced test bench features?

Well, in general, you know, we are looking at our product line in a fashion where no matter what we want our basic products to be totally competitive and then then invariably the variety of evaluations or extensions to the products that the customer pays additionally for. Simulation, in general, has been a very competitive arena and so there we are happy to have the strongest solution and thus command potentially on average a little higher price than the other guys.

Great. Thank you.

You're welcome.

Thank you for your question, and our next question comes from the line of Rohit Pandey with Credit Suisse First Boston. Please go ahead.

Thank you. A couple of questions. Steve, on the annual bookings guidance you have increased up front contributions, whereas for the revenues the up front mix has not changed. How do you explain that?

The up front went up slightly a little bit in the range, but the main reasons are number one Q1 was very high up front quarter, but number two, we haven't been booking the term licenses that are on a due and payable basis so things have bifurcated into some up fronts and some more TSLs, but it has driven the up front percentage up a little bit. We also, just put the range up as a -- more as a precaution, I guess, than anything else so that -- make sure we are in the range, people aren't surprised if it did drift up, it won't necessarily be at the top or even the middle there.

Why isn't the revenue up front contribution going up?

Because some of the up front is compensating for what has not been booked in the due and payable term licenses which ordinarily would have had a reasonable amount taken in the first year.

I see. Okay. And then to meet the last quarter bookings target do you have to bank a lot in Japan?

I would say not. No.

No.. Okay. And is there a fee associated with the revolver?

There was a very small fee paid up front that is amortized over the life of the revolver.

Do you intend to keep it or terminate it?

No, we intend to keep the revolver open and use it as necessary for acquisitions or desirable for stock repurchases or other types of activity.

A couple of questions for Aart. Aart, how can you play the memory IT space now you already have a six transistor offering from the Avanti acquisition, so do you think you will be playing the six transistor memory cell or would you look for [inaudible] acquisitions possible.

As I mentioned -- this point in time we are purposefully a little quiet and coy around the memory situation given the legal background. And so all I want to say at this point in time really is that there are multiple additional alternatives to ultimately get into that market if we desire to do so and our focus right now is on the rest of the IP business which is doing well and so we have plenty to do there.

Okay. And then on Galaxy, you doubled the performance of the tool. Can you highlight the most important technology change which was done there which resulted in doubling the performance of the whole platform?

Well, the interesting thing is in order to double the performance of a platform you have to double the performance of a whole bunch of tools and, I think, what was, in many ways extraordinary and you can read up a little bit in the press release of Monday, is how many tools doubled and in some cases did much more than doubling across the board of all the products. And by the way, we did this while simultaneously reducing memory significantly which is not a small feat. In general though, I think the the most important enhancements, aside the measurable doubling of speed and capacity and feature set is the fact that it is now such a well aligned product set in terms of its correlation and that really reduces risks for customers substantially.

Did you have to lower the number of databases [inaudible] these tools [inaudible] using, like did you go down from three databases to two or something like that.

So, we, we, we did reduce the number of databases and data structures because there is more and more alignment. We always had a front end component to that and back end component to that. Milkyway is cloning a very key one, which already, about 6 months after we acquired it, we opened up and have been using broadly, and so from that perspective these things are very well aligned as well.

So do we have two databases now or is it one?

It is fundamentally two databases for the information that is used, because typically for the front end and back end you don't intermingle the data.

Do you think is there a chance for you guys to further up that performance by -- for the more database changes or how much more juice is left in like upping the speed in the area of performance of the whole platform?

There is always opportunity and we are actually already moving well on the next generation, but it has nothing to do with databases. Databases are a little bit of a red herring, they are a mechanism to store stuff and communicate stuff with the outside world. It has almost nothing to do with runtime. And, as a matter of fact, most of the run time advancements are done by deep algorithmic improvements and we see a lot of opportunity still.

Okay, thank you

You are welcome.

Thank you for your question. Gentlemen, there is five minutes remaining on this conference. We will take the next question from the line of John Gray with Lehman Brothers. Please go ahead.

Yeah, hi guys. One question here on your average renewable license on the duration side of things moved up from 2-7 to 3-7. Can you talk a little about how you would expect the duration of trend going forward.

For the rest of the year we expect it to come down with the average would end up being somewhere between those two.

A lot depends on performance in the last quarter, but the 3.7 was really driven by a couple of transactions that were with good long-term partners who made major commitments to the Synopsys technology so that is what took it up for the quarter, but I expect it to come down this quarter and for the year.

Okay. So it is somewhere, you know, between, you know, where we are at -- somewhere between the 2-7 and 3-7 is where it ends for the year?

Yes.

Okay. And then also you did mention that North America was a little weaker versus -- versus Asia-Pacific. Aart, can you talk a little bit more about what you are seeing in North America and where you would expect that to go if the next quarter or so?

Well, you know, the story is almost not so much North America as the rest of the world and especially, of course, the Far East. We mentioned Japan returning sort of, you know, a ten year lull. Asia-Pacific has been on a growth ramp for the last five years or more. And we expect that to continue. And we see that in I would say all the -- all the regions that we give that nomenclature to, which is Korea, Taiwan, China and India. And of course the major big markets potentially going forward are China and India. And so I expect that to continue. And, the question is ultimately how does high tech redistribute itself around the world. Yeah, the changes are not going to be as big as many people forecast, but they are substantial nonetheless in terms of a regional growth rates.

Okay. Thanks a lot, guy.

You're welcome.

Thank you for your question. Our next question comes from the line of Erach Desai with American Technology Research. Please go ahead.

Good afternoon, gentlemen. A couple of questions. Steve, I believe that overall bookings appear to be down year-over-year. Could you comment on what product bookings did on the year-over-year basis?

Well, Erach we said for the year that we expected the first three quarters to be flat to "downish" and that to have a significant year-over-year gain in the fourth quarter, so it is not a surprise I think both product and maintenance bookings were down year-over-year, but that was as expected. Remember, Q2, for example, Q2 of FY '03 was the biggest bookings quarter in the company's history anyway.

That was a huge quarter that you guys had, yep.

Yeah.

Okay. Then, second question, why did gross margin nudge down sequentially on higher revenues?

I'll have to get back to you, I will think it probably had to do with services business which is the biggest swinger in gross margin. Possibly also the ramp up in TSLs, but let me get back to you on that one.

Thats fine, we can take that offline. You mentioned this is part of your commentary and I guess I'm trying to reconcile this, Steve. Your time based revenues declined sequentially, I believe they were 170.6 million in the first quarter. Does that reflect that deals coming off subscription exceeded deals coming on?

Sure, that is what it would have to mean. I mean in time based revenue what you have is what goes on versus what goes off. As I said, it was Q1 was not a very strong quarter in TSL bookings. Now, just to go back to gross margin. I, first of all, I don't discuss it on my call -- on my remarks and we don't actually consider it that material. We tend to manage to overall expenses as opposed to gross margin. Its really a function -- gross margin is for us a function of allocation among different license types, it is not meaningful and not really anything we can control.

Okay. Just finally, then, you cited a 10% bookings and revenue customer. Was the same as the customer in fiscal first quarter?

Revenue customer was the same, but the bookings customer was not.

Okay. Thank you.

Yeah, thanks.

You're welcome.

Thank you for your question, and we do have a question from the line of Jennifer Jordan with Wells Fargo Securities. Please go ahead.

Yes, gentlemen, I believe most of my questions have now been answered. Just one question for Aart. When you are looking at the growth that is coming based on optimizing across the whole platform can you talk a little bit about where you see that going with your IP platform, in the past, my understanding is that the strategy is not only to correlate better the manufacturing rules into the design tools, but also to incorporate better the IP into the design tools. Is that correct?

Absolutely, correct. Actually the strongest link has to be between IP and verification. Because if you listen to customers over the last five, six years they've had a bunch of horror stories around IP and it is always the same story. Either the IP wasn't verified well, or by the time they used it, the guys that sold it to them disappear, and so we put an enormous amount of effort in verifying the IP, but most importantly we have linked it very well to our new verification techniques that are really doing well. And secondly, of course, we have longevity and we do support our customers very well by the time they are engaged in design, and so our objective with IP is to move from selling them one to -- or more copies of a piece of IP, to really become, what we call the house brand, where we are trusted entity, where the legal agreements are in place, where the business structure is in place, and where they sort of can order straight off the catalog, and be sure that it will work well with the tools and that the quality overall is there and I think we are moving well in that direction.

And Aart as you get to that place, where there is more IP commodity, what do you think it the best two things both revenue or licensing models for that IP and then could you give some sense of what you think the market size will be?

Well, the market is clearly growing very rapidly and I would say it is -- I would -- in my opinion it is strongly linked to the move to 130-nanometer. At 180-nanometer a lot of people, you know, by hook or crook did their chip design. At 130 we have so many transistors that you want to get IP blocks for a variety of sources. Secondly, the IP blocks are becoming much more complex. And so, a lot of people did their own USB1, but we are without a doubt the largest provider of USB2today, which is more complex. So, it is well possible that over a number of years the IP market could grow to be commensurate to the EDA market for example.

Okay, and then finally two kind related -- I guess related questions. One is you -- in terms of analog design and looking at the future for IP how important is it to have a broader play with analog tools than to strictly be in the verification side of the business?

Well actually we have been investing well in analog, in our analog efforts and business are doing well. I mentioned specifically Nano Sim and H-spice having grown well, but also having had major technology advances. The other thing is, and this is much less known, is we actually increasingly doing more analog IP and so the so-called fives, which are the most tricky parts to do on let's say a USB or PCI, we do those and with the merger with Accelerant we brought some fabulous, both technology and technologists into the family.

Okay, great. Thank you.

You're welcome.

Thank you for your question. I would now like to turn the conference over to the hosts for the closing remark.

Well, we appreciate your spending the time with us today, as usual Steve and I will be available for follow-ups. And; hopefully, we will see a number of you at the upcoming design automation conference. Thank you for spending the afternoon with us.

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