新思科技 (SNPS) 2004 Q3 法說會逐字稿

Welcome to the Nassda Corporation third quarter 2004 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Ms. Tammy Liu, Chief Financial Officer for Nassda Corporation.

Please go ahead.

Good afternoon ladies and gentlemen.

Welcome to our earnings conference call for the quarter ended June 30th, 2004, which was our third quarter of fiscal 2004.

Before we start reviewing the results, I would like to give the following Safe Harbor regarding forward-looking statements.

During the course of this conference call, we will make forward-looking statements.

Those forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially.

These forward-looking statements include, but are not limited to, statements with words like expect, anticipate, target too, plan to, continue to, may, potential, will, or the negative of those terms.

For a discussion of the relevant risks, please refer to the risk factors section of our most recent SEC filing, our annual report on Form 10-K for the fiscal year ended September 30th, 2003, and our quarterly report on Form 10-Q for the quarter ended March 31st, 2004.

I will start by reviewing the financial results for the quarter and Sang Wang, our Chief Executive Officer, will give you his views of the general economic environment, the status of our business and outlook.

Through today's discussions, we will refer to the quarter ended June 30th, 2004 as Q3 and March 31st, 2004, as Q2, and so on.

During Q3, we saw some improvements in customers' budgets and increased activity, even though customers remained cautious in their spending and negotiated intensely for discounts and special payment terms.

Customers also often use competitors' aggressive pricing and bundling as leverage.

We continue to be flexible in both licensing structure and payment terms.

As a result, ASP decreased during the quarter.

Under these challenging conditions, we're very happy to report that we have just achieved quite a satisfactory quarter, with those bookings and revenues being the highest in Nassda's history.

Bookings in Q3 by geographic locations were as follows -- domestic was 56 percent;

Europe, 9 percent;

Japan 29 percent; the rest of Asia was 6 percent.

Again, the two strongest territories were domestic and Japan, primarily due to large orders received from major accounts in these territories.

By license, type, and as a percent of total bookings, potential license accounted for 20 percent of our overall booking, TBL was 68 percent, maintenance was 12 percent.

We booked 3 orders over $1 million, which included a new TBL and two renewal orders, with one US and two Japanese major accounts.

Additionally, Q3 being a seasonally high TBL renewal quarter, we achieved our highest percentage of bookings from TBL in Q3, of 68 percent.

On the other hand, maintenance bookings as a percent of total bookings was the lowest at 12 percent, due to seasonality and a high level of maintenance bookings in Q2, which was 35 percent and the highest percentage historically.

From a revenue perspective, revenue for Q3 was approximately 11 million, a 12 percent sequential quarter-to-quarter growth, and exceeding our guidance.

With a low TBL bookings of 35 percent in Q2, TBL revenue in Q3 increased slightly in absolute dollars -- however, decreased as a percent of total revenue to 53 percent as compared to 59 percent in Q2.

Maintenance revenue also increased slightly in absolute dollars -- a decrease as a percent of total revenue, from 25 percent in Q2, to 23 percent in Q3.

Micron technology accounted for approximately 10 percent of the total revenue in Q3.

No other end-user customers accounted for more than 10 percent of our total revenue in Q3.

Geographically, the distribution of revenue was as follows.

Domestic was 68 percent;

Europe, 9 percent;

Japan, 14 percent; rest of Asia, 9 percent.

Domestic revenue was strong due to our success in some Asia accounts in the US.

Cost of goods sold include third party OEM royalties and allocated AE support costs.

During Q3, cost of goods sold decreased slightly, due to lower OEM royalties versus Q2.

As of June 30th 2004, our total headcount was 110, an increase of 2 from previous quarter.

Overall operating expenses increased by approximately 1.1 million, primarily due to increases in both distributor and internal sales commissions, accrued bonuses, and marketing expenses that were primarily related to DAC.

R&D had a total headcount of 49 at the end of the quarter.

Expenses increased by approximately $400,000 in Q3, primarily due to the increase in bonus accruals.

As a percent of total revenue, R&D expenses increased slightly at 22 percent in Q3 as compared to 21 percent in Q2.

Sales and marketing expenses increased by approximately $600,000 in Q3, due to increased commissions, both distributors and internal sales, and increased -- the bonus accruals and DAC-related expenses.

As a percent of total revenue, sales and marketing expenses increased to 30 percent in Q3 as compared to 27 percent in Q2.

Headcount increased by one, with a total of 48 at quarter-end.

G&A expenses increased by approximately $100,000 in Q3, primarily due to increases in accrual bonuses.

As a percent of total revenue, G&A expenses decreased to 34 percent in Q3 versus 37 percent in Q2, due to increases in revenue.

Litigation legal costs for Q3 was $2.7 million, which equates to 25 percent of total revenue.

Headcount remained at 13 as of June 30th, 2004 for G&A.

Operating income was 8.6 percent of total revenue which was the same as Q2.

Effective income tax rate for fiscal 2004 has decreased to 23 percent from 30 percent, due to lower than projected income for fiscal '04 as a whole, and a true up for our fiscal '03 tax provisions.

Our actual taxes for FY '03 were lower than the accrued amounts.

This resulted in much lower tax accrual for Q3 FY '04, with an effective tax rate of 11 percent for the quarter.

GAAP net income has been improving steadily and was 10 percent of total revenue, or 4 cents per diluted shares, beating external guidance in Q3, as compared to 8 percent or 3 cents per diluted shares in Q2.

Cash and short-term investments reached almost $100 million, and again increased in Q3 by 3.7 million, primarily from net income and an increase in deferred revenue.

A decrease in accounts payable was offset by increases in accrual compensation, and income taxes payable.

Accounts Receivable remained relatively flat and DSO fell slightly to 17 days as of June 30th, 2004 from 19 days as of March 31st, 2004.

Deferred revenue has two parts, short-term and long-term, and total deferred revenue increased by approximately $1.9 million, primarily in deferred maintenance and TBL during Q3.

As of June 30th, deferred revenue was back to its December 31st, 2003 level in the aggregate.

I would like to reiterate that we expect deferred revenue to fluctuate from quarter-to-quarter depending on the timing of the invoicing of TBL and maintenance, and their respective payment terms.

That concludes my comments about last quarter's financial results.

With respect to Sang's comments regarding our outlook, I would like to reiterate my earlier Safe Harbor regarding our forward-looking statements about the uncertainties we face and about our ability to perform as we have anticipated.

We also want to communicate our policy regarding forecasts.

In connection with the SEC rules on corporate disclosure, Reg FD, we have established our procedures for publishing and updating our business outlook.

In addition to today's discussion, we expect that during the fourth quarter our corporate representatives will meet or discuss privately with investors, the media, investment analysts, and others.

In these discussions, they may reiterate the business outlook discussed publicly during our quarterly earnings conference call, but we do not intend to give material guidance beyond that discussed in prior public statements.

Now I will turn this over to Sang.

Thank you Tammy.

Good afternoon ladies and gentlemen.

We appreciate your joining our earnings conference call for Q3, FY '04.

As reported by Tammy, our Q3 results work quite satisfactory.

Indeed, we're very pleased that with our staff's excellent team effort, we exceeded our guidance for Q3 quarterly revenue and have met earnings expectations.

While the business climate for the semiconductor industry improved in the quarter, our spending on research and development tools remained limited.

Under the circumstances, we would like to attribute our Q3 achievement also to our customers' increasing usage of our products.

The slight caution that our customers continue to show in their R&D spending.

During the quarter, nevertheless, our team worked diligently under a very competitive environment and achieved this fine quarterly results, which we are quite proud of.

Compared to the same quarter a year ago, our Q3 bookings total improved by more than 20 percent.

Among them, the time-based license bookings were over 65 percent of the total bookings.

As a result, our financial visibility also increased nicely.

On the profit and the revenue side, we made 4 cents EPS on a revenue of $11 million for the quarter, which represents about 46 percent year-to-year and a 12 percent sequential quarterly revenue growth.

Furthermore, our total cash balance grew considerably, and reached almost $100 million.

We hired 4 new staff to support our business growth during the quarter and our workforce increased to about -- increased about 2 percent.

So overall, it was a good quarter for Nassda.

Looking at the semiconductor industry trends, SIA predicted recently that the worldwide semiconductor revenue would grow at an annual rate of 28 percent this year.

However, there's no assurance or clear indication of when a consistent procurement of more new EDA tools will take place.

We hope that it will happen in the second half of calendar '04 and continue into 2005.

With this said, the consensus for 2004 EDA industrywide revenue growth is still currently predicted to be in single digits.

Included in our Q3 bookings were orders from three customers over $1 million.

Three customers exceeding a half million dollars and five customers larger than $300,000.

Among the top three orders, one was a multi-year, multi-million dollar TBL order from Japan.

Our existing sizable customer base was augmented by 7 new accounts.

Year-to-date, we are still on pace of adding one new customer each week.

Furthermore, bookings for our new products, and the product options in Q3 are on track to meet our fiscal year '04 target.

One important progress made in Q3 was that major account bookings returned to our previously-established levels.

Our top-20 major accounts contributed to over 60 percent of our Q3 bookings.

We intended to maintain this momentum going forward and to provide our major accounts with products that meet their needs, along with the highest quality of technical support.

Our Q3 bookings revealed that market demand for detailed circuit verification and analysis tools is rising.

We also noted that our post layer analysis product and options drew increased interest and attention from customers and their prospects during the quarter.

We continue to believe that our product will be used more broadly in this year to resolve users' nanometer circuit verification, timing, power, noise, and reliability problems.

During Q3, our R&D team focused its effort on Version 5.0 product, and HSIMplus platform release.

This release went reasonably smoothly at the end of April and early May.

Some users have already given us positive early feedback.

The HSIMplus platform allows users to select a range of analysis options beyond the basic circuit simulation capabilities.

These options help analyze various aspects of a complex nanometer circuit to assure its silicon success.

The benefits are more flexibility and an improved ease-of-use of these options as a solution in one integrated environment.

These capabilities include circuit design diagnostics, dynamic and aesthetic power net IR drop analysis, device and interconnect reliability analysis, Co-Simulation with leading digital simulators and accelerated circuit verification with tens of millions of interactive parasitic elements.

We believe that HSIM 5.0 and the related options can contribute to our users' design sign-off and silicon success -- and also, likely to assist designers to realize yield improvements.

The Q3 marketing highlights included a concerted promotion of HSIMplus platform, and Version 5.0 software and a successful trade show at the 41st Annual Design Automation Conference.

HSIMplus shipped with 5 new options, and HANEX 5.0 shipped with a hierarchical code timing analysis capability.

We had a highly successful in DAC in June with very busy suite presentation and floor demo activities.

We also brought back of good numbers of new leads.

One satisfied HANEX customer from Europe came to share their success in using the tool with many visitors to our suite.

We also have joint presentations at DAC with Mentor Graphics on a working hierarchical instructions and post layer verification flow.

During the DAC show, the annual EDA survey by CMP, based on IC designers' feedback was publicized.

This year, among 32 EDA companies, Nassda was ranked number fourth in customer satisfaction, number fifth in repurchase loyalty, and number fourth in referral potential.

The survey results show that we have become more visible and more popular among IC designers.

In conclusion, we have achieved considerably higher Q3 bookings and revenue than those a year ago, due in part to an uptick in the macro-semiconductor economy, and in part to an increase of demand for nanometer circuit verification and the analysis tools.

Clearly, we must maintain and build on this momentum.

HSIMplus platform and version 5.0 give us a good foundation for providing an integrated solution and a more versatile post layout capabilities to nanometer designers.

So we a have good premises going forward.

Our strategy for Q4 is to focus on our major account business and selling more new products and options.

Through spending our R&D and the sales and support efforts, we plan to add several new staff members to our team, in preparation for fiscal year '05.

Now, I would invite Tammy back to give you the guidance for our Q4 quarter and fiscal year 2004.

Before we open for questions, here's our guidance which has been included in our press release.

We have had a good quarter, with the help of some improvements in global economy, and increasing designs at 130 nanometer and below.

Additionally, as more of our business transition to TBL over the last two years, we have had an increasing percentage of our revenue derived from renewable business -- meaning TBL and maintenance.

This means that we have increased our revenue visibility.

However, we have not seen major changes in our customers' purchasing behavior.

Therefore, we believe it is prudent to be conservative and assume that customers' behavior will remain unchanged during Q4.

Based on these assumptions, we have provided the following guidance.

For Q4 fiscal '04, we expect revenue of 10.8 million to 11 million, and fully diluted earnings per share of approximately breakeven to 1 cent for the quarter ending September 30th, 2004.

Time-based license order bookings as a percent of total bookings is expected to be between 50 percent to 70 percent, and TBL revenue as a percent of total revenue will be between 50 to 60 percent for Q4.

With the anticipated additional investments in resources and increased legal fees as the ongoing litigation moving towards trial, we believe that our overall operating expenses may increase between 10 percent to 15 percent from Q3 to Q4.

Therefore, we are lowering our earnings guidance to breakeven.

For fiscal 2004, we expect total revenue of 41.2 million to 41.5 million, which will be 18 percent year-to-year growth and fully diluted earnings per share of 8 cents to 9 cents, lower than the previous guidance of 13 cents due to lower earnings in Q4.

We will keep our earnings release and earnings conference call replay available on our Web site at www.nassda.com until July 21st, 2004.

Now, we will open the floor for questions and answers.

(OPERATOR INSTRUCTIONS) Rich Valera, Needham & Company.

Good afternoon, Tammy and Sang.

First on the overall environment, you sounded again a little bit more hopeful about some of the things you're seeing with your customers -- but at the same time, it sounds like spending hasn't -- spending patterns have not really changed.

Would you characterize it as essentially unchanged from last quarter?

I would tend to think it improved slightly for our type of products.

But I don't know whether other EDA companies have similar experience.

At least our customers were willing to negotiate with us.

And more customers are willing to purchase our product last quarter.

So we saw some upturn tendency.

However, as Tammy mentioned, every order needs to be negotiated very intensively, and we have to stay flexible to close an order.

So it's still not very easy type of business environment.

Then with the new products, I think your target for the year as a percent of bookings is -- I think it's 15 to 20 percent.

I think you were ahead of that pace through the first couple of quarters.

How did you fare this quarter with respect to the new products as a percent of total bookings?

I think we mentioned that the target for the fiscal year is 10 to 15 percent.

And so far, we're right on track.

And depending on the Q4 performance, we certainly hope to meet or exceed the 15 percent -- high end of the forecast.

(multiple speakers) For Q3, Richard, we were over 10 percent.

I thought you were actually over 15 percent in the first two quarters, I may have been --

Actually, Q2 we were over 15 percent.

But Q1, we were 10 percent or so.

On average, we're right now in the middle of 10 to 15.

Okay, that's very helpful.

And with respect to the increased OpEx next quarter, Tammy, can you say roughly what those are due to -- like, proportionally, what percent is due to new hires and what percent is due to increased legal?

I think it is difficult -- as you know, legal fees are not as controllable as most people would like to see it.

And so far, historically, for example in Q1, it was 2.9 million;

Q2, 2.8 million;

Q3, 2.7 million.

So, it's around that range.

What we're looking for is in Q3 -- in Q4 as we get closer and closer to try our expectations that there will be a lot more activity.

And, therefore, we are really putting into our P&L -- you can call it a reserve -- for the potential increase in legal fees and the anticipated hiring of additional resources.

The difference really is probably around $1 million -- a little over $1 million.

So, it's hard for me right now to say which portion is going to be for which.

I think we feel that million dollars is adequate to -- for those two reasons.

But I didn't really specifically allocate a certain amount.

Understood.

Finally, with respect to the Synopsis litigation situation, I don't think you have discussed publicly.

But, would you, or should -- would you be willing to talk about any consideration of a cleanroom reimplementation of HSIM?

Is that something you're willing to discuss?

I think we are not really discussing clean room.

What we continue to do as a company is, we continue to look to opportunities to develop new products, right?

So we continue to move forward on any product development innovations.

But we have not discussed publicly or with anyone as far as a clean room process.

From our perspective, even though we have a bad ruling from the referee, which we strongly disagree with, we will continue to defend ourselves vigorously.

At the same time, we feel very strongly also that we at Nassda developed the product ourselves from day one.

So we are really not a clean room per se.

But we continue to focus our R&D efforts to develop new products.

Thanks very much.

Jennifer Jordan, Wells Fargo.

I think actually you answered most of my questions here.

I think the other thing I'm interested in is, are there any companies that you're seeing providing you competition at the moment to HSIM?

Or who you would consider the closest rival at this point?

And then could you talk a little more about the work that you're doing with Mentor Graphics and how that's being received by customers?

I think from the competitive landscape point of view, as you all know, there is still -- Synopsis is our biggest competitor.

And after the acquisition of Celestry, Cadence also has emerged to become a competitor by promoting, selling ultra-thin products.

But we commented in the past -- and also this quarter -- we haven't seen, in our accounts, switch to the ultra-thin usage as yet.

But nevertheless, certainly there are -- Cadence sales team are pretty active out there in the field.

And so that's the answer to the first question -- what's your second question?

My second question is, what has the relationship with Mentor Graphics done for you?

And has it helped you compete with Synopsis, for example, or compete with Cadence?

Well, we been working together with Mentor Graphics in terms of developing some joint solutions -- in two projects -- one having to do with the mixed signal solution, integrating our product with their advanced mixed signal solution system, and ADMS system.

And I think it's going quite well.

And now we have some data release capability in the field.

And the other project is with the Calibre product group.

They have this new hierarchical parasitic extractor called Calibre xRC.

We been working with the R&D group there, to integrate the two capabilities together, to form this hierarchical extraction and a full chip post verification flow, which already proven to be working because there was a press announcement from Mentor Graphics about two months ago -- there's a company called Syntech who use that Calibre xRC to do hierarchical extraction and the follow with using our product to verify the entire circuit with high level of satisfaction.

So there was a press announcement of that join in our capability.

Finally, you talked a bit about customers being very -- or Tammy did -- about customers being very aggressive in terms of their -- or, excuse me, competitors being very aggressive about discounting, and that making it more challenging to negotiate with customers.

Could you elaborate on that a little more and what you're seeing?

I think in general, as we are a much smaller Company and our competitors are much, much larger companies, we've seen quite a few quarters now.

Actually, I don't think it's something that only Nassda sees.

But a few other small ADA companies also are -- are I guess, seeing what these large companies are doing is not only everything.

And then, by the time you're done with the bundle, our competitive products in that bundle appears to be very, very, very low-priced.

Therefore, whenever we go in to a customer and wanted to do an evaluation, technically, the customer say yes, your tool may be good, it performs better.

But here in meantime, I have this other tool here that is 1/10 or one-half of what you're asking for.

That's what we're faced with.

That's what we have to deal with.

But we have to make a business decision, whether we -- what do we do with the pricing.

And I think because of that competitive environment out there, that we -- in addition to the economy not as, I guess, robust as we have seen years ago -- which I don't think we will ever see that again.

We continue to see our customers using all different resources and all different tactics to kind of give us a lot of pressure and our ASPs continue to decrease.

But I think it's the challenging environment, and Richard was also talking about that.

I think it's the just overall environment of the last year or year and a half or so.

It's just different than what we used to seeing 3 or 4 years ago.

All the purchasing guys with our customers are -- understand where they are, understand the competitive environment, and they understand how to negotiate.

So what we're looking at is the way we look at business is, one more customer for us is one less customer for our competitors.

I think that's what we need to look at.

But so far, I think even though our ASP continues to decrease, we're able to continue to increase our customer base, and increase our revenue at the same time.

One less question.

You talked about how the decrease in the EPS guidance is primarily driven by combination of reinvestment, or additional investment in new products and legal expenses.

Can you characterize which one is the bulk of that reduction in EPS?

You know, it's very hard for me to say which one.

I think primarily, I would say -- I have to give it a guess, I would say half-half.

Okay.

Okay?

But I think our P&L is established -- our operating model is in such a way that it is pretty flexible.

We have always been able to manage our operating expenses pretty efficiently.

We should be able to compensate one way or the other.

But right now, you're probably looking at a half.

Thank you, Tammy.

(OPERATOR INSTRUCTIONS) Bill Frerichs, DA Davidson & Co.

I don't have my file with me.

I was wondering if you could remind me of what the original revenue and EPS guidance was for this quarter.

Sure, I believe the original revenue guidance was 10.4 to 10.6 -- we did 11 million.

Earnings per share guidance was 4 cents for Q3, and we've met that guidance.

And for Q4, I believe the revenue guidance was actually for the whole year was 41 million.

So, it actually went up a little bit because our Q3 revenue was higher.

For earnings per share, Q4's original estimate was somewhere in the range of 4 cents.

Our guidance for fiscal '04 originally was 13 cents.

So now we're looking at 8 cents to 9 cents because in Q4 we're expecting to break even.

Okay, so essentially -- you outperformed in Q3, and -- but, you haven't really raised Q4 guidance, per se?

No, I have not raised Q4 guidance.

Got it.

Okay.

Secondly, and this is more, I guess, for Sang Wang.

On the analog side of the design world, people have been talking about more analog content, and SoCs.

And I was wondering if you're seeing that actually occurring now?

And if your tools are a prominent part of those activities?

Bill, you're right.

I think your observation is correct.

In the field, there's more SoC that are needing the analog content in there, because of the -- I think -- interfacing with human kind of -- through the analog median.

Before, we were more in the memory design space.

But, about 3 years ago, we start to come in into the analog space.

And so far, we've been doing extremely well in providing the higher performance, higher capacity analog simulation verification capability to our users.

And I estimated we may have over 150 users use us for analog mixed signal applications.

So today, we are indeed becoming an important player and a contributor in this particular space, which is growing.

Very good.

Thank you very much.

At this time, there are no further questions in the queue.

I will now turn the conference back over to Miss Tammy Liu, for any closing or additional remarks.

Thank you all very much for participating in our conference call this afternoon.

I wish you all have a wonderful day.

Thank you very much.

And that does conclude today's conference call.

Thank you very much for joining us.

You may now disconnect.