新思科技 (SNPS) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to Synopsys Inc.'s conference call for the first quarter of fiscal 2005.

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

Later we will conduct a question-and-answer session and instructions will be given at that time.

If you should require assistance during the call, please press star followed by zero.

Today's call will last one hour.

Five minutes prior to the end of the call I will announce the amount of time remaining in the conference.

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

At this time I would like to turn the call over to Lisa Eubank, Vice President of Investor Relations, please go ahead.

Thanks, Beverly.

Good afternoon, everyone.

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 company's best current judgment about future performance and events 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 the conference call, important factors that could cause the company's actual results to differ materially from those that may be projected are described in Synopsys' fiscal 2004 and annual report on Form 10-K which is on file with the Securities and Exchange Commission and in Synopsys' earnings release for the first quarter of fiscal 2005.

In addition, Synopsys would like to advise you that all financial information to be discussed on this conference call as well as the reconciliation of certain non-GAAP financial measures to GAAP financial measures is contained in the earnings release or in Synopsys first quarter financial supplement.

These documents can be found in the Investor Relations section of our website at www.synopsys.com.

With that I'd like to turn the call over to Aart de Geus, Chairman and Chief Executive Officer.

Good afternoon.

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

Thank you for joining us.

I'm pleased to report a very solid Q1.

We made excellent progress on the strategy described in our last earnings call which was, first deliver solid financial results while completing the transition to almost fully ratable, more predictable business model.

Second, build momentum as we deliver the most complete proven Silicon proven solution.

And third,expand our addressable market by driving down into manufacturing and up into system design.

Let me review each of these in turn.

On the first element of our strategy, we met or exceeded our financial targets on every metric.

Book-to-bill was 1.8 as we posted the second largest bookings quarter in Synopsys history.

We beat our internal plans and added significantly to backlog.

Revenue was 241 million, at the high-end of our target range.

Pro forma earnings were $.10 per share above the top of our target range.

Our license model transition continued on track.

We will booked 97 percent ratable licenses and only 3 percent up front licenses.

With respect to geographies, North America an excellent quarter with a large three year renewal and a number of big competitive wins.

Europe was solid with demands coming primarily from fab companies in the consumer and wireless markets.

Japan posted a fairly quiet quarter as expected in this part of the typical Japanese business cycle.

Asia-Pacific continued to perform well outpacing Japan for six of the last seven quarters.

Our early investments there continue to pay off.

Overall, a very satisfying performance against a semiconductor environment that is relatively stable, cautious, flat, and clearly focused on cost control.

With the percentage of consumer designs growing, and increased globalization, focus on cost control has become a permanent feature of our environment.

While this focus creates challenges for our industry as a whole, it nevertheless plays to Synopsys advantage from three perspectives.

One economic pressures are leading customers to consolidate their business with fewer vendors.

Two, technical challenges such as yields and low power at 90 and 65 nanometer, requires solution containing tools that are highly tuned to each other.

Three, comprehensive technical support on a global scale has become an absolute must as customers have discovered painful shortcomings in support among some other EDA providers.

All three of these play to our strength.

We believe this is the reason why our pricing and discounting patterns have been quite stable over the past several quarters.

Going forward, we are committed to getting fair value for the strong technology that we will roll out the rest of this year.

The second element of our strategy is building on our technology momentum.

I am pleased to report excellent progress here.

Our Galaxy platform, which integrates our design implementation tool, has evolved rapidly over the past six months.

Major product releases in June and December delivered top to bottom integration as long as sizable improvements in speed, accuracy and functionality.

In [INAUDIBLE] the design compiler, for example, resulted in better timing, reduced chip area and greater than 2X improvements in runtime.

The full correlated 2004 releases of physical compiler Astro and Primetime improved time to results garnering positive feedback from customers across-the-board.

Our newest release of JupiterXT, which does floor planning and fast prototyping was completely overhauled in 2004.

The resulting product is highly competitive and already making inroads in replacing incumbents.

Most encouraging overall is that since the June release of Galaxy we are seeing a steady substantial increase in benchmark wins leading to business wins.

Customers like our present solution and feel the momentum of our road map.

Synopsys is by far the most widely used solution at 90 and 65 nanometer.

Let me provide a few examples of our success in Q1.

At a North American semi-conductor company specializing in communications networking, a benchmark win for Synopsys at 130 nanometer combined with the overall breadth of our portfolio ousted the incumbent.

In another case, a large semiconductor supplier for broadband communications decided to expand its operations internationally.

They chose Synopsys over a supplier with a narrower portfolio, due to our broad technology strength, our solid road map, and our global scale.

Finally, a leading provider of Bluetooth wireless communication devices performed an extensive technical review for Synopsys and the competition.

They chose Synopsys for their 90 nanometer flow, despite lower pricing from the competition.

One of the key reasons was the low power capabilities of our solution.

Offering a complete platform was important in all these examples.

But one aspect of our solution that really stands out is low power design.

Low power is crucial, not just to extend the battery life of portable products such as cell phones, PDA's and music players but also to deal with increasing heat in computers, networking chips and other high performance IC.

To handle low power issues, point tools just don't cut it.

The problem must be addressed in a systemic fashion as low power trades off against speed, test and yields.

We foresaw this need a number of years ago and embedded power reduction techniques throughout Galaxy.

The results have been excellent.

Synopsys consistently delivers excellent 15 to 20 percent better results than competitors in low power optimization, and we are undefeated in competitive benchmarks based on power.

Recently on a 90 nanometer media embedded processor design Toshiba achieved a 40 percent power reduction using Galaxy.

Looking forward many of you know that we have been engaged into a two-year effort to roll out a brand new set of capabilities this spring and summer.

We are well on track.

Initial beta feedback is very positive and a number of recent multi-year commitments solidified as customers assessed our progress.

Discovery, our verification platform also made great progress during Q1.

In verification, what counts is bug finding smarts and speed.

The traditional approach has been to offer separate point tools or loosely bundle them together and call it a platform.

Discovery has changed the paradigm.

We have full integrated automated test bench capabilities and other smart bug finding innovations with our simulation engine.

The result is an average 5X speed up on verification time, plus full integration with transistor level capabilities.

This speedup was released for all customers in December.

It has already compelled a number of companies to switch to Synopsys for their verification solution.

Discovery is also primed for SystemVerilog, the next generation verification language that promises better time to results.

This year we expect accelerated adoption of SystemVerilog as verification teams increasingly choose an open standard over proprietary languages such as E.

In summary, both Galaxy and Discovery are showing technical momentum leading to improved business opportunities.

Now for the third element of our strategy, expanding our addressable market.

Expansion for offers two directions, down towards manufacturing with our design for manufacturing or DFM efforts and up towards the system level through our reusable intellectual property products.

Starting with DFM, we have made some big investments over the last two years.

In Q1 we made excellent progress in both the business and the technology.

The way to think of DFM is as the bridge from design all the way to manufacturing yields.

The smaller the geometries in the design the more the yield is directly impacted by the design specifics.

Only a few points of swing in the yields can turn a profitable chip into an economic loser.

Fundamentally DFM has four critical pieces, design, physical verification, mass optimization and process tuning.

Our approach has been to build and/or acquire key technology in each of these areas.

Now we are connecting them into a comprehensive solution.

In design, our December Galaxy release included a number of new features targeted at yield enhancement.

Our ability to optimize yield along with timing and power simultaneously is unique.

In physical verification, our December release of Hercules delivered sharply improved lithography checking speed.

We have since begun work with a major Asian foundry for on yield and hit FX for very small geometries.

In mass optimization, UMP has adopted our [phase-shift] masking technology.

We also had strong business for our optical proximity collection products.

And finally in the process area we completed the acquisition of ISC, a Swiss company with excellent modeling technology to help accelerate ramping up new processes.

Our process related products are now in use at 19 of the top 20 semiconductor companies, and we're beginning to form deep relationships with leaders in the equipment industry such Applied Materials, IMEC, and KLA-Tencor.

Our customers increasingly understand how the DFM puzzle pieces fit together.

They know that only a full solution of a deliverable, high performance, low power, high yield chip.

Our differentiation is evident by excellent [INAUDIBLE] orders performance in DFM.

Looking upward to our systems our IP business can be thought of as building blocks as design.

We've grown the largest IP business in EDA, differentiated by product breadth and quality.

We focus on chip infrastructure IP.

We now have a complete family of connectivity blocks such as USB and PCI-Express.

The economic benefits of buying IP versus building IP are clear to customers at strength of our brand is steadily increasing.

This assessment is supported by increase in multiyear multimillion dollar volume purchase agreements for our IP cores.

This quarter, for example, we entered into such agreements with Toshiba and Global Unit Chip.

In conclusion I'm very excited to see the pieces coming together on a vision we have been pursuing for several years.

To recap, first in Q1 we delivered solid financial results.

At the same time, we built for the future with a more predictable business model and significant backlog growth.

Second, across-the-board, our latest technology advances are succeeding in the market.

Customers feel our momentum and our keenly anticipating our new technology coming in 2005.

Last, our initiatives and IP and manufacturing are expanding our addressable market beyond the traditional bounds of EDA, adding to Synopsys competitive differentiation in a significant way.

All and all, Q1 was an excellent quarter.

With that, let me turn it over to Steve.

Thanks, Aart.

Q1 was the second quarter in a transition to an almost fully ratable license model and I'm pleased to report that we met or exceeded our goals on every financial metric.

Operationally, with approximately 91 percent of revenue coming from backlog, we reached our revenue target well before the end of the quarter.

Free of quarter end revenue pressure, we are better able to focus on quality of orders and on receiving appropriate value for our technology.

My comments, I will review the details on the quarter and then provide our guidance for Q2 and fiscal year 2005.

My comments, including the numbers, will be posted on our website after the call.

During this call, I will discuss certain non-GAAP measures of our financial performance, reconciliation of non-GAAP results to GAAP results appears in the press release and in the financial supplement posted on our website.

Let me now turn to the results.

First quarter revenue $241 million, within our guidance range of $237 million to 243 million, due to our shift to a more ratable license mix, revenue declined by 15 percent or 44 million from Q1of fiscal year of 2004.

One customer accounted for more than 10 percent of revenue for the quarter.

Up front license revenue in the first quarter was $11 million. $49 million less than Q1 of fiscal year 2004 reflecting our mix to a more ratable license mix.

Up front revenue accounted for approximately five percent of total revenue.

Time based licensed revenue was $186 million an increase of 9 percent or $16 million or over Q1 of last year.

Included Q1time based license revenue is approximately $10 million from one term contract that was recognized on a payment terms basis.

As a result, we expect Q2 time based licensed revenue to dip slightly although we expect sequential growth throughout the rest of the year.

Time based licensed revenue accounted for 77 percent of total revenue.

Services revenue which includes both maintenance and consulting was $44 million or 18 percent of total revenue. 81 percent of revenue came from our core EDA products in design and verification, 16 percent came from out emerging businesses in IP and Design For Manufacturing, and three percent came from professional services.

Regarding bookings the book-to-bill ratio for the quarter was approximately 1.8. 97 of product orders were booked as time based licenses and only three percent were booked as up front licenses versus a split of 43 time based and 57 percent up front a year ago.

Approximately $7 million in up front orders booked in Q1 will turn to revenue in the rest of fiscal year 2005.

One customer accounted for more than 10 percent of orders in the first quarter.

The average length of our renewable license commitments was approximately three years in Q1.

We continue to believe that three years is the standard contract length for us.

We are not seeing the trend of shorter contracts that others have reported, perhaps because our customers have a high degree of confidence in the strength of our technology position over the long term.

Aggregate non-GAAP expenses for the first quarter were $223 million, at the low end of our target range of 223 to $233 million due to variety of factors, including a scheduled shut down of our North American facilities over the year end holidays and our focus on expense controls.

Non-GAAP operating expenses exclude $37 million in amortization of intangible assets and deferred stock compensation and $6 million of in process R&D charges related to the acquisitions completed in the first quarter.

Regarding expenses in general, we are committed to enhancing both our growth prospects and our profitability for the long term.

Therefore, we are focusing our spending on key projects and continuing to look for ways to streamline our overall operations.

Non-GAAP operating margin was 7.6 percent from the quarter up from approximately 1 percent in Q1.

Other income for Q1 was approximately $4.7 million.

Higher than expected due primarily to a one-time recognition of a 3.9 million cumulative and quarter gain on our yen dollar hedges based on a reevaluation of application of FAS 133 on our hedging activity.

Our non-GAAP tax rate increased to 37 1/2 percent for the quarter reflecting a 2.2 million increase in our reserve related to routine state and foreign audits.

Although the amount is small, it had a disproportionate impact on the tax rate because pre-tax net income, which has been affected by the license model shift, is relatively low.

Our non-GAAP effective tax rate exclusive of this one-time expense was approximately 28 percent.

For the year as a whole we continue to expect our non-GAAP tax rate to be 31 percent.

Fully diluted share count was 147 million for the quarter within our target range of 144 to 152 million.

The net effect of the foregoing is that non-GAAP earnings were $.10 per share above our target range of $.05 to $.07 cents per share.

We had better-than-expected cash performance for the quarter based on a favorable mix of payment terms.

GAAP cash flow from operations was $142 million in Q1.

CapEx was approximately $6 million.

Cash and short-term investments were $583 million at the end of Q1, a small increase from the end of Q4 and solid collections more than offset 92 million with the closing of ISC and other accusations.

Geographically, approximately $241 million of our cash is in accounts in United States and $343 million is in accounts overseas.

During the quarter we purchased 2.3 million shares of Synopsys stock at an average price of $17.11 per share.

As of the end of the quarter, approximately 485 million remained in our repurchase program.

Q1 accounts receivable totaled 108 million, down $24 million from last quarter.

As a result DSO was 41 days, down from 52 days last quarter.

Deferred revenue at the end of the quarter was $513 million, up $110 million from the end of Q4 reflecting favorable payment terms on our subscription licenses during the quarter.

Aggregate backlog, which includes both deferred and off balance sheet deferred, and measured the aggregate commitment of customers to Synopsys, increased meaningfully during the quarter, given the very healthy book-to-bill ratio.

Head count totalled 4664 employees at the end of Q1, an increase 217 from the end of Q4.

The increase is mainly attributable to accusations.

Now a brief update on our pending acquisition of Nassda, which is going well.

As we have reported in late January, we received a second information request from the Federal Trade Commission under the Hart Scott Rodino Act.

We are working on provided the FTC with all requested operation and are optimistic that we will close the transaction before the end of the quarter.

We'll provide additional information on the impact of the transaction on the financials first earnings call following closing of the transaction.

I'll now describe our expectations for the second quarter and fiscal year 2005.

Overall, we are increasing our expectations for the year based on our Q1 results, which reflected a higher than expected other income and expense as long as good operating results.

Our view for the year continues to be shaped by the caution that we see in our customer base, by our position at a relatively low point in the renewal cycle for our major customer contracts, and by the shift in our license mix.

Let me remind you that all of our target numbers are estimates only, and are based on our judgment as of today.

Actual results may be affected by many factors including industry conditions, the mix of licenses actually sold, pricing, payment terms and tax payments.

For the second quarter our targets are as follows.

Revenue between $238 million and $248 million.

Total non-GAAP expenses between $222 million and $232 million.

Other income and expense between negative $2 million and positive $2 million, a non-GAAP tax rate of 28 percent, outstanding shares between 142 million and 150 million, and non-GAAP earnings of $.06 to $.10 per share.

We expect revenue from backlog to account for more than 90 percent of revenue.

For the full year our targets are as follows.

Revenue between $940 million and $980 million.

We have taken the bottom end of our range up by $10 million, as our performance in Q1 has given us greater confidence about the year as a whole.

Outstanding shares between $142 million and 150 million, a non-GAAP tax rate of 31 percent, a non-GAAP earnings-per-share between $.26 and $.36 per share an increase from our previous range of $.22 to $.32 per share.

Our target for GAAP cash flow from operations is over $200 million, an increase over our prior target of $150 million.

Over the next four quarters, we expect approximately 780 million of the amount currently in backlog to turn to revenue.

I'm pleased with the solid financial results for the quarter and with the stable, more predictable foundation we're building.

With that we will now open for questions.

Ladies and gentlemen - [CALLER INSTRUCTIONS] Our first question will come from Garo Toomajanian from RBC Capital Markets.

Please go ahead.

Thanks.

Aart, both you and Steve touched on quality of orders and pricing.

Is there any way that you can quantify how you've been able to be more firm in pricing over the last year or so?

Sure.

At the end of the day, pricing is very much influenced by what you have to offer from a product overview.

When products are differentiated, by definition, you'll do better.

In general, we look at the discounting in aggregate obviously and also different types of transaction, and the reason why I was make the statement that our pricing and discounting patterns have been very stable is that we tracked it that over many, many quarters and it has been essentially unchanged I would say for six or seven quarters.

In general, we think that things may actually improve a little bit as we clearly sense that our technology, both position, meaning what we have in the market right now and momentum in terms what have's coming out, has strengthened significantly over the last nine months or so.

As we see in benchmarks and as we see in benchmark leading to business.

And so we are acutely aware of the fact that cost is key to our customers, at the same time we also can advocate strongly the impact on the technology on the overall cost and, therefore, I think we will be okay.

Okay.

Good.

You guys have mentioned in the past that you're sort of a low point in your renewal cycle at this time.

Wondering when you see that starting to ramp-up or what could possibly delay or accelerate that will are.

Garo, this is Steve.

Well, we do see the renewal cycle by natural expiration of contracts picking up in FY '06 and the important thing is what's the size of the renewal and there the strength of the technology perform the as well as the overall technology will determine how big those renewals end up being.

But if you just look on a contract basis we'd say '06 will be stronger than '05.

If I may answer that, Garo, I think the other thing is the raw technical need and so if the two things that stand out in terms of increasing importance right now it's low power issues and verification issues.

And on the low power side people are moving quite rapidly to 90 nanometers, a lot of leakage issues there, the impact is very visible in what we can do.

On the verification side, the embedded test bench capability is really having some impact and since the verification is growing significantly in terms of the time it takes to verify a chip I wouldn't be surprised if we saw customers wanting some technology long before their renewals are due.

When would you expect the 65 nanometers are going to become a more meaningful driver for leading edge to mainstream customers?

We don't report in great detail any more on the 90 nanometer chips because there's so many.

We're talking over 350, over 150 tapeouts, although internally we self-track every single one of them.

It's already clear that the issues that I talked about, the power specifically, is a big issue at 90 nanometer and the demand is some very solid EDA tools which we have.

Regarding 65 that is, of course, much earlier in its cycle with about 40 designs, I think we see 11 tapeouts so far and there the good news, is our tools are essentially qualified to support all of the design rules needed and there are many of those.

What I expect we'll see at 65 is that pretty soon more and more yields questions will bubble up and in many ways that helps us because we've invested very heavily in that dimension in our implementation tools.

Thank you very much.

You're welcome.

Thank you, we'll now go to the line of Jay Vleeschhouwer with Merrill Lynch.

Please go ahead.

Thanks, good afternoon.

Steve, a couple questions around bookings.

First, when you look at what you've done in the first quarter, and in terms of your expectations for the remainder of the year, what are seeing or expecting in terms of run rates in the contracts, in other words, gross value divided by duration, are you, in fact, seeing or can you anticipate organically growing run rates with many of our most of your customers?

Jay, we are very focused on run rates now, especially in the highly ratable world because the key towards building business is obviously building on a consistent basis the run rate.

In the first quarter, our run rate grew, and obviously in this environment you have some customers that grew a lot, some that grew a little bit less and some that were basically flat but overall in aggregate the run rate grew.

I don't think it makes sense to just focus on renewal to renewal growth which is sorts of implied by your question, because right now where our focus is building out our penetration in customers and working on the incremental order to build up the run rate between renewals.

And to in some ways keep the customer committed to us for the long-term.

So it's hard to give you the mathematical precision you're looking for but obviously run rate is something that's very important to us right now.

When we look at, what you did in 2004 in terms of the profile or distribution of deal sizes, the way we look at it, you had let's say one deal or so around the $50 million level, half a dozen or more we think in sort of that 20 to $50 million range and then everybody else, of course.

Excluding the one large deal you just did in Q1, is there any reason to think that there would be a significant shift in the mix or number of deals by profile or distribution of size this year or perhaps even more looking into next year?

Fundamentally there's no reason to believe that whatsoever.

I think the distribution is a little bit arbitrary because if, in a given year, you have five larger deals versus three that feels like a big difference but the reality is the semiconductor industry splits up the same old rules.

You know, 20 percent of the buyers do 80 percent of the business or something like that, so it's like any other business.

But fundamentally we don't see a shift at all.

I'd like to reiterate Steve's point which is despite the fact that obviously our business on one hand is very renewal oriented the other aspect really the intermediate technology that we can bring to the market because people need it.

And we have a lot that is -- that has been put on the market recently, we have a lot more coming out and so for us it is a good time to reapproach customers no matter what.

Two last ones Steve.

In the last call in December you said X Nassda the other cumulative bookings from the other deals, or acquisitions rather, would be about $35 million this year generating about $20 million in incremental revenue.

Is that number still the same or have you updated?

And lastly with respect to the value that you're anticipating for product, with respect to Galileo specifically, have you resolved how you're going to treat maintenance versus upgrade pricing for that?

Can you talk us through at all how you're thinking about in fact getting paid incrementally for that new technology versus just folding it in as part of maintenance?

Thank you.

Let me address the first part of your question first which is there is no update but also no change in what we think the acquired companies X Nassda will yield.

On your second question, as you know, we've never formally acknowledged the existence of any product with a project name that you cited.

In general, when we bring things to market with material new capabilities, we put them into the install base as upgrades, meaning that we provide a transition path for the customer, but we also require incremental value to be paid in order for the customer to get access to the new technology, and I would expect, you should expect that any major new capability that comes out will follow that pattern.

Thanks, Steve.

Thank you.

Our next question comes comes from the line of Harlan Sur with Morgan Stanley.

Please go ahead.

Good afternoon.

First question for Steve.

I think you said the company exited the company with about 4600 employees.

I'm just wondering what's headcount assumption factored into your full-year guidance.

And second if you could just talk about deal closure at the end of the quarter.

Just wondering if you saw any pushouts.

Okay.

On the head counts assumptions we will be, of course, we expect to close the acquisition of Nassda at some point hopefully before the end of Q2.

Beyond that, I think that headcount assumption is for relative stability, nothing dramatic either way.

In terms of deal closing, it was a good quarter for closure rate.

It was an affected by one large deal which we have reported on.

Uh-huh.

In terms of thing getting pushed out, I think there was -- there is pipeline entering Q2 but I wouldn't say that there were deals that ended up getting pushed out for any particular reason I can think of.

It was a solid quarter with a very normal level of -- normal process and progress on deals to closure.

Would you say that relative to the previous two quarters that end of the quarter closings were much better-than-expected?

They were good.

I think they were right on what we had expected Harlan, I don't think there's anything -- maybe a little better than average actually given the size of the total order pool.

And great the and question for Aart regarding the DFM strategy.

I would assume in order for a good DFM strategy to work you would really need to have very tight partnerships with all of the semiconductor foundries globally and obviously, early data sharing and yield issues and parametric data sharing is very critical.

So my question is, how is Synopsys trying to facilitate these partnerships and how willing will these fabs be to share their early yield issues and parametric data with you?

It's fairly simple.

People share only when they see a benefit for themselves.

The big benefit immediately we have a lot of technology that helps them ramp their own process success, by virtue of deep modeling, be it at the process level or at the device level and so having those connections right away put us very, very close to the people that have to develop the technology.

And then from there, you link upwards towards providing the electrical models that represent what is being manufactured and one works up the food chains through the libraries all the way to the tools.

And so so far we have not seen any resistance to share, the exception being, of course, always people worried that their home secrets would make it to somebody else, but there we're very, very well-equipped to know how to protect their individual recipes.

So I think this will turn out to be a very strong area for us.

Thank you.

One more question if I may, again for Aart.

You know, the semiconductor industry had a good year last year, revenue growth of 28 percent.

My estimate is that R&D spending probably grew in the low double digit percentage range last year.

The EDA industry did not benefit from the from this increase in spending, but my sense is a lot of the companies are spending increasingly more of their budgets on software and systems development, things like firmwear, protocol stack, full reference platforms and things like that for consumer enhancement applications.

I'd like to get your thoughts on how Synopsys is positioned to maybe capture more of this opportunity going forward.

What you're describing applies much more to the system side of the industry than to the hardcore semiconductor side, because on the semiconductor side they're spending a lot more on process evolution and so each is heading toward its denier own differentiation.

Referring to the system process one of the reasons that we've invested heavily in the IP side is to be connected to the people who do system designs that assemble large blocks and large chips and I think over time you will see with the IP gradually they'll be available more and more embedded IP.

That is a market that per se has not really been very large from an EDA perspective.

That may change over time but a lot of flee Linux tools available, C tools and so before investing too heavily, notwithstanding there's that many designers there, we need to make that your there's a really solid return on investment.

Thank you.

You're welcome.

Thank you, we'll now go to the line of Sumit Dhanda from Banc of America.

Please go ahead.

Good afternoon, guys.

Couple of questions.

Firstly. on the bookings number that you put out, the book-to-bill of 1.8, could you help us understand what really drove the upside.

Was it the large deal?

Was it a better than expected trends in the rest of your business and if I look at your outlook for revenue for the rest of the year, should I expect a significant fall-off in this bookings rate to get to that revenue number?

Well, Sumit the business other than the big renewal was ahead of plan and by a nice margin, so there's certainly some upside there and no comments on the rest of the bookings.

As for the rest of the year, this was the second-largest bookings quarter in the company's history.

I think you should expect that the following quarters will be lower and other than that, I don't think we'll give you that much detail.

The revenue will fall into our range and so you should probably be able to triangulate to get your orders number, given our model to the range.

As a follow-up to that, your Q2 revenue outlook, what kind of up in front license bookings percentage that is predicated on?

Well, we've said that we would expect anywhere between 5 and 10 or 5 and 10, so you can expect it to be in the single digits somewhere.

Low end of the range because in quarter you came in at 3 versus --

Yeah, this quarter we came in at the low end principally because of the large renewal.

The rest of the quarters will fluctuate between five and 10.

And if you could give some clarification on what you meant by the $10 million deal on payment term basis, how should we think about that?

Sure through fiscal '04 we were also were selling term licenses and most of the term licenses had revenue that was up fronted, but a few of them had revenue where the revenue is recognized on payment terms.

Actually very few of them.

One of those deals, we put that revenue in the time-based licenses, so one of those deals done in Q3, I think it was, of last year had a payment due in January which meant that the revenue came in for the entire payment amount in January and since we put it in time-based license revenue it had a blip effect on the TBL line.

But no impact on the TBL booking.

No, it's a prior book deal.

It was booked last fiscal year.

Thank you.

Okay.

We'll now go with the line of Raj Seth with SG Cowen.

Please go ahead.

Steve, a couple of quick ones.

First a follow-up on bookings in this quarter.

If you take out the big deal, whatever that was, were bookings up year to year in this quarter?

I haven't thought of it that way, Raj, and I think the answer's probably no.

Okay.

And just so I'm clear, in response to Jay's question you were talking about charging for the product whose name you can't mention, some of the new technology.

How does that relate to your historic remix practices?

Can you just clarify that?

Sure.

We actually been very careful about limiting the amount of remix in general but in particular, remix into new technology.

And that would mean that there may be some customers who have a small amount of their pool that could be remixed into new technology and some who could remix into it on a sample basis but for a variety majority of the pools out out there, our customers have to upgrade to get the new technology.

They'll be able to add to the existing pool but only with an upgrade fee it in.

And typically what percentage of the contract value, on average, do you allow people, is that remix portion?

Into new technology?

Yes.

It's very low.

Okay.

And I mean, it's not in many contracts either.

The vast majority have no remix in the new technology.

Aart, one for you.

It seems like user growth is highest or C growth is highest internationally in some of the emerging Asian geographies.

Can you talk a little bit about your strategy to capitalize on that in Asia and I'm curious if you've thought about repackaging your offering for some of those designers many of whom are trailing edge and sort of how you're going to capitalize over there?

Sure.

The first observation is that different part of the geography are very different in terms of behavior from each other and so, for example, if you look at and India, I would not quite say that they're much lower technology-edged than the traditional west, largely because many of the large international companies really are the ones that are driving the largest number of designs.

And in the last five years and specifically in the last 18 months, I would say, these design teams have become extraordinarily competent at almost the same level if not the same level as their counterparts in the west.

And so therefore, they demand absolutely state-of-the-art technology.

,If you're looking at countries such as China, they are -- the observation is quite correct that most of the design is I would say .15, .18, .23 micron, but the learning surf is very, very steep and people do want to have very complete products.

And so in those situations, almost more important than the actual product themselves, is to make sure that one has a strong support organization in place.

And that, of course, as big challenge for companies because you need a lot of people.

You need to have very competent people and you need to have them in time.

Luckily for us, we were very early in Asia and we can absolutely see the success of that because it's supported by our business results, Asia-Pac right now is satisfied Japan in terms of the business level and this is I forget six out of seven quarters or so so it's been quite right.

How do you deal with the IP issues over there or are they for you not a big deal.

IP comes in different flavors.

I don't mean IP per se, I mean Intellectual Property around your software.

It is well understood in countries like China and a few others there is utilization of software that's illegal.

At the same time sooner or later people need support, sooner or later companies go public and then we meet them again, so to speak.

I think over time we'll see improvements there.

I think our industry will gradually protect it's software more and more.

I don't think that it is a huge problem but there's definitely upside opportunity going forward.

All right, thanks.

Thank you.

We'll now go to the line of Erach Desai from American Technology Research.

Please go ahead.

Hi, guys.

I think most of the questions have been answered.

Let me get back to the bookings and perhaps product bookings.

Steve, if you were to project your project bookings for the full fiscal year 2005, would that be as you had the strong fiscal first quarter and sort of the rest of the quarters planned, does that look to be above fiscal '03 bookings?

No.

Okay.

And the second question is a more logistical question.

I can't make the $.10 pro forma work, but that's a separate, my calculator problem.

Can I just get a sense, if the $3.9 million gain were not included what would pro forma EPS have been, roughly?

Pro forma EPS would have been $.08.

Okay.

Thanks.

Thank you, the we'll now go to the line of Jennifer Jordan with Wells Fargo.

Please go ahead.

Yes, I just want to get back to, you said a minute ago, Steve, that without the large renewal order, you expected that the total bookings in the first quarter were not up year-over-year or up year-over-year?

I said they were not up and I'm looking at it, and I think that's, that is correct.

Okay.

Great.

I mean, having said that, Jennifer, let me emphasize that as compared to plan for the non-major renewal they were actually still ahead of plan.

Right.

Still ahead but -- still ahead of plan, right.

And then as you look over the rest of the year, the -- it makes sense to me that your bookings and the subsequent, at least the subsequent two quarters here are likely to be down relative to the size of bookings that you did in Q1 because that large order would normally have fallen in the Q4.

Is that a reasonable way to think?

Sure it's a fair statement to say that Q1 is usually our lowest bookings quarter and the movement of one large renewal from Q4 into Q1 could very well make it the largest bookings quarter for the year.

Right and that also indicates that this goes to your idea about renewals of contracts that there's no other large orders similar to that one in this coming Q4 of similar magnitude?

That's correct.

And then my last question relates to what Jay was asking about in terms of growth of the total value of orders when they renew and what you're looking for, because you were talking about adding additional incremental sales and so I guess my question is, is there some risk when you're doing these larger orders to that growth as you get out to the renewal that you don't see when you do the smaller incremental orders?

I don't think so, actually.

I think the renewals are very stable and you have a very good sense long before you get to the actual contract signing of where your business is going with the customer.

I'm sure there's always competitive activity, but I don't think one would see any surprises and the differences would really mostly be at the margin.

In general the way most of these things work is you put a base arrangement in place and throughout the life of the contract you either sell the increments or sell increments and extend the whole thing, so it's rare that any of these will get to the very end anyway.

Right, that raises the other question which is this was a really large renewal where you weren't able to extract any growth.

Is there any comments on that?

No, no conclusion, we're not commenting on that.

Okay.

Thank you.

Okay.

And we have no further questions in queue.

Please go ahead with any closing remarks?

I think we're done at this point in time.

Thank you so much for participating in this call.

We're looking back on a very strong first quarter, and therefore, feel pretty good about the outlook going forward.

As usual Steve and I will be available for additional comments and so have a good afternoon.

Bye-bye.

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