新思科技 (SNPS) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Synopsys Inc.'s earnings conference call for the second quarter of fiscal 2004.

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 conference over to Lisa Ewbank, Vice President of Investor Relations.

Please go ahead.

Thank you.

Good afternoon, everyone.

With us today are Aart de Geus, Chairman and CEO of Synopsys; and Steve Shevick, CFO.

During the course of this conference call, Synopsys may make predictions, estimates, and other forward-looking statements regarding the Company.

While these statements represent our 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 we highlight during this call, important factors that could cause our actual results to differ materially from those that may be projected are described in our quarterly report on form 10-Q for our first quarter of fiscal 2005, which is on file with the Securities and Exchange Commission, and in our second quarter earnings release.

Both of these documents are available on our website.

In addition, we would like to advise you that all financial information to be discussed on this call, as well as the reconciliation of the disclosed non-GAAP financial measures to their most directly comparable GAAP financial measures, can be found in our second quarter earnings release and financial supplement.

Both of these documents are available now on our website at www.synopsys.com.

With that, I would like to turn the conference over to Aart de Geus.

Good afternoon.

Thank you for joining us.

As we discussed at our March investor conference, our objective is to increase revenue while improving operating margin and earnings through a predictable, stable business model.

Our areas of focus are; one, core EDA growth; two, market share gains through superior technology and vendor consolidation; and three, expansion into new growth markets.

The central aim of everything we do is to deliver increasing productivity to our customers.

Against this set of objectives we are well on track.

I'm pleased to report that in Q2 we again had a very solid quarter.

Specifically, book to bill was greater than 1.1, notably higher than our internal targets and solidly on track for the year.

Revenue was 244 million and pro forma earnings were $0.09 per share, both within our target range.

Our transition to the most predictable license model in our industry is progressing well.

In Q2 we booked 94% ratable licenses and just 6% up-front licenses.

Lastly, we are on track towards our goal of greater than 20% operating margin by 2007.

Before I review our business highlights, let me comment on the overall environment.

The consumer segment is now the strongest driver for the semiconductor industry.

Hot applications include wireless infrastructure and mobile phones in most of the world; flat screen digital TVs, especially in Japan and Asia; networking applications in North America; and, of course, as those of you with children know first hand, gaming and entertainment.

All these products have two things in common.

An already high but still growing semiconductor content, and an insatiable hunger for the most complex, most integrated, and most advanced silicon technologies available.

This is good for EDA and great for Synopsys.

The hallmark of consumer electronics is a unique combination of technical complexity, time to market urgency, and cost sensitivity.

All three of these mean one thing, design productivity is essential.

This is where Synopsys differs from the competition.

We've always had strength in individual point tools, but in our recent releases we have improved productivity throughout the entire design flow in dramatic and measurable ways.

More than anything else, this improves the return on investment for our customers.

A good example of the power of our flows occurred in Q2.

We had a competitive win against the incumbent of a global storage wireless and networking leader.

This customer chose Synopsys' physical verification because of its fit into a complete flow as well as our ability to help them reduce their number of suppliers.

As indicated by customer wins like this, we have gone on the offensive, fueled by great technical momentum.

There are three reasons behind the momentum.

First, during the last three quarters we've had a steady stream of excellent product releases.

This is technology that is available and in use at customer sites today.

Second, we have established ourselves as the leader in solving the two biggest challenges facing design; low power and yield.

And third, we are driving improvements in design productivity as our flows perform measurably better with each new release.

To substantiate this momentum, let me give you some highlights from Galaxy, our implementation platform.

A leading wireless chip provider chose Synopsys for its first 65-nanometer project, a mobile phone processor with multimedia capabilities.

Why Synopsys?

At 65-nanometer, power leakage during standby is a serious problem, so battery life is a key differentiator.

This company replaced the physical design incumbent with Synopsys precisely because of our flow's completeness and our unique low power capabilities.

Another leader in communications used the complete Galaxy flow on a mobile application processor for a cell phone.

Since was it was the company's first 90-nanometer design, they were especially concerned about yield.

But with Synopsys' designed for yield capabilities and integrated flow, the company produced a successful tapeout.

The third example comes from a very large Asian communications company who recently chose Synopsys after a low power benchmark.

We delivered a 90-megahertz faster circuit, 45% better than the competition.

In general, where low power is a requirement, Synopsys wins.

And finally, we grew share with a world leader in graphics, video, and multimedia chips.

This customer needed a low power solution for its 90-nanometer flow while planning for its move to 65-nanometer.

After evaluating us against a smaller competitor, they adopted the full Galaxy flow for the first time.

Quality, time to results, and superior support were the key factors in their decision.

Meanwhile, we are not standing still.

Q2 of course brought the eagerly awaited introduction of IC Compiler.

This new cornerstone of Galaxy 2005 combines the best of physical synthesis, place and route, timing sign-off, and yield optimization.

On track for general availability in June, IC Compiler is already in greater demand than we expected.

Still in limited availability, the number of customers has tripled to a dozen in just two months.

We are accelerating the training of our support teams to meet the demand.

The first customers who endorsed IC Compiler in March at our Synopsys users group conference uniformly reported not only 10% improvements in speed or area, but also an unprecedented 40% faster time to results. 40% is a huge increase in productivity for them.

But that is not the only area of great progress.

We are simplifying and strengthening each of Galaxy's three main functions; logic design, physical design, and signoff.

The introduction of DFT MAX is a great example.

With tremendous ease of use, customers achieve substantial test data compression, thereby reducing their test costs.

This is possible because DFT MAX is highly tuned to all the other products that touch tests throughout the Galaxy flow.

In the first two months of use, results have been overwhelmingly positive, including customer adoptions and tapeouts.

In signoff, we just announced PrimeRail.

PrimeRail is a key ingredient in the industry's only comprehensive signoff solution for timing, signal integrity, power and layout verification.

Finally, in logic design, we have another big announcement coming up that will impact predictability of the entire logical and physical flow.

Improving predictability is a key factor in avoiding excess iterations, which is one more way to improve customer productivity.

Stay tuned for more on this announcement.

As you can hear from my comments, cobbled-together point tools -- I call them Frankenstein flows -- are running out of steam.

After many years of investment and effort, a complete, highly optimized design platform from Synopsys is now delivering clear productivity and economic advantages.

This view is supported by the most recent chip statistics.

Of the 178 90-nanometer tapeouts completed to date, more than 80% use Synopsys physical design tools.

At 65-nanometer, we are tracking 74 designs, of which 13 have taped out.

Eleven of the 13 used Synopsys place and route tools.

Let me now move to Discovery, our verification platform.

Similar to Galaxy, we've transformed it from a collection of fast point tools to an aligned platform focused on efficient bug-finding.

In this context, we are pleased to welcome the technologies and team of Nassda, which will further strengthen our mixed signal offering.

The acquisition closed last week.

Within the Discovery platform, the highlight this quarter was the success of our native testbench capability in VCS. 5X improvement in performance sure gets our customers' attention.

This performance boost, coupled with the completeness of our debugging environment, is driving our success.

As an example, 5X faster performance in a technical benchmark enabled us to displace the two incumbents at a provider of broadband wireless.

Meanwhile, we achieved another important milestone in Q2 by delivering SystemVerilog Testbench to seven beta customers.

Now, let me update you on our expansion into new markets.

Down to manufacturing with DFM, and up towards systems with IP.

DFM had a very strong quarter as customers invest in design for manufacturing and yield improvement capabilities.

The migration to 90- and 65-nanometer increases the importance of yields.

Anticipating this, we have systematically invested in the entire DFM flow, ranging from layout to physical verification to mask optimization and process tuning.

Today, Synopsys is the only vendor with such a complete solution.

Our investments are having a positive impact on our relationships with customers and partners across the electronics landscape.

Just recently, a communications chip leader evaluated the Synopsys DFM environment against two competitors.

They chose Synopsys specifically because of our DFM awareness throughout our flow.

Looking up to the systems level, our IP business is a key ingredient in system design productivity.

This is especially true for widely used connectivity IP, where we are the number one provider worldwide and recognized for the best IP quality, processes, and support.

As a result of several significant releases in Q2, we now have a complete family of USB and PCI express connectors, including both analog and digital components.

Finally, through our services and support organizations, we can see that our customers face increasing complexity challenges.

Our services are sold out, and our support capabilities are fully utilized.

We are not only helping customers improve productivity, but are also intimately involved in the most advanced designs around the globe.

Having our teams work closely with customers at their locations is increasingly valuable as we help them migrate to Synopsys as their preferred vendor flow.

Before I conclude, let me address the press release announcing Steve Shevick's departure.

Steve has decided to pursue other opportunities at a private company outside of EDA.

I want to personally thank Steve for all that he has contributed to Synopsys over the years.

In various functions, Steve has been central in many cornerstone decisions and actions, be they major acquisitions, sophisticated business model changes, or excellent progress towards timely SoX certification.

Steve will stay on to certify the quarter, after which we wish him well in his next endeavors, and going forward, we consider him a close friend of the Company.

Although we will miss Steve, I'm very confident that we will quickly find an experienced CFO to take his place.

The search is underway and we are already working on an initial list of candidates.

In the meantime, I'm pleased that Rex Jackson, whom many of you know as our general counsel, will serve as interim CFO.

Rex has been with Synopsys since early 2003 and is a recognized leader in the Company.

With that, let me conclude.

We had another very solid quarter.

We are on the offensive with strong technical momentum and are making good progress against our growth objectives.

With that, let me turn it over to Steve.

Thanks, Aart.

Today, I'd like to review the details of our financial performance for the quarter and then provide guidance for Q3 and fiscal year 2005.

We will then open the call for Q&A.

For your convenience, a copy of our remarks and all the numbers I discuss will be posted on our website.

Before I begin my commentary I would like to thank you, Aart, and the entire Company for the many opportunities you have offered me in my almost ten years at Synopsys.

During this time I have seen my own career develop and had the privilege to work with an incredible group of people.

I'd also like to thank the analyst and investor community for the many friendships I have developed and the many useful insights and suggestions, both solicited and not, for how to improve the performance of the Company.

Now, with the Company successfully shifted to an almost fully ratable license model, our SoX-404 certification effort well under control, and a strong finance team in place, this is a good time for me to pursue another opportunity.

The Company is financially very solid and is executing on its long-term growth strategy.

Synopsys has more cash than anyone in the industry, a license model that promotes long-term growth in customer run rates, a backlog equivalent to over a year and a half's worth of revenue, and a commitment to growth in profitability.

The technology development engine is cranking at full throttle.

In an environment in which technological and economic imperatives will increasingly and inexorably favor vendors with complete correlated solutions, Synopsys is in a great position to prosper over the coming years.

Now, to the quarter's numbers.

Q2 was a good quarter for Synopsys.

Q2 was the third quarter in our transition to an almost fully ratable license model and the third straight quarter in which we met or beat our plan.

We are building a solid foundation for predictable and sustained growth in revenue and earnings.

In my comments I will discuss certain non-GAAP measures of our financial performance.

Reconciliation of non-GAAP results to GAAP results appears in our press release and in the financial supplement posted on our website.

Q2 was a very good bookings quarter.

The book-to-bill ratio is between 1.1 and 1.2, ahead of our internal plan.

No customer accounted for more than 10% of orders.

Our orders mix reflected continued execution of our shift to a more predictable, almost fully ratable license model. 94% of product orders were booked as time based licenses and only 6% as up-front licenses, versus a split of 58% time based and 42% up-front a year ago.

Approximately 5 million in up-front orders booked in Q2 will turn to revenue in future quarters.

The average length of our renewable customer license commitments continues to be approximately three years.

From a product perspective, every product area performed above plan for the quarter.

Q2 revenue was 244 million, within our guidance range.

This is compared to 241 million reported last quarter and 295 million reported for the second quarter of fiscal 2004.

The year-over-year comparison reflects the shift in our license model.

One customer accounted for more than 10% of revenue in the second quarter.

The revenue mix reflects our goal of increasing the predictability of our results.

For the third straight quarter more than 90% of revenue came from backlog.

Up-front license revenue in the second quarter was 17 million, approximately 7% of total revenue and 59 million less than in Q2 of last year.

Time based license revenue was 176 million or 72% of total revenue, an increase of 8% or 13 million over Q2 of last year.

Services revenue, which includes both maintenance and consulting, was 51 million or 21% of total revenue.

76% of revenue came from our core EDA products in design and verification, 18% came from our IP and design for manufacturing businesses, and 6% came from professional services.

Aggregate non-GAAP expenses for the second quarter were 228 million, within our guidance range.

Non-GAAP operating expenses exclude 37 million in amortization of intangible assets and deferred stock compensation.

Research and development was up compared to Q1 due to increased R&D headcount overseas and accrual of most of the 2005 earnout on the ISE transaction, a result of bookings ahead of plan on the technology acquired from ISE.

Sales and marketing fell, due to lower commission accruals compared to Q1.

In addition to our focus on growing revenue, we continue to explore ways to drive margin expansion through expense management.

At the same time, we are investing in new technologies and are in the midst of several critical platform upgrade cycles.

So we will control costs prudently so as not to jeopardize the future revenue contribution of those new products.

Non-GAAP operating margin was 7% for the quarter and other income was 1.3 million.

Our non-GAAP tax rate was 29%.

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

Fully diluted share count was 146 million for the quarter, within our target range.

The net effect is non-GAAP earnings at $0.09 per share, within our guidance range.

GAAP cash flow from operations was negative 11 million in Q2, which was consistent with our expectations, given the record level of collections in Q1, the timing of payments on outstanding receivables, and scheduled tax payments.

CapEx for the quarter was approximately 15 million.

Cash and short-term investments were 524 million at the end of Q2, down approximately 58 million from the end of Q1, largely reflecting the impact of share repurchases and the cash flow results just described.

Geographically, approximately 159 million of our cash is in accounts in the United States, with 365 million in accounts overseas.

During the quarter we purchased 2.6 million shares of Synopsys stock at an average price of $17.32 per share.

As of the end of the quarter, approximately 440 million remained in our repurchase program.

Q2 accounts receivable totaled 135 million, up 27 million from last quarter.

As a result, DSO edged up to 50 days from 41 days last quarter and remains the lowest in the industry.

Deferred revenue at the end of the quarter was 495 million, down 18 million from the end of Q1, as expected, reflecting timing of customer installments.

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

Head count totalled 4,769 employees at the end of Q2, an increase of 105 from the end of Q1.

The increase is mainly attributable to expansion of R&D capacity in lower cost geographies.

As we announced last week, we completed the acquisition of Nassda on May 11.

To summarize the terms, we acquired Nassda for 200 million in cash or $7.00 per share.

At closing, net cash paid to Nassda shareholders was 46 million after subtracting from the purchase price Nassda's 92 million in cash and the 62 million in payments received from the individual defendants in the Nassda litigation.

In addition, over the next few weeks we will pay approximately 2.5 million related to Nassda's settlement of outstanding shareholder litigation.

Our guidance for Q3 and the full fiscal year reflect the estimated contributions from the acquisition, which we expect to be slightly accretive this year and solidly accretive in fiscal '06, although both periods are affected by a transition to our license model.

As is our practice with acquired companies, we will not be providing separate financial information about Nassda going forward.

Now, to our expectations for the third quarter and for fiscal 2005.

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.

In addition, since the Nassda transaction closed just last week, we have not yet finalized certain items such as deferred revenue treatment under purchase accounting and valuation of the litigation settlement.

For the third quarter our targets are as follows.

Revenue between 243 million and 253 million, total non-GAAP expenses between 228 million and 238 million, other income and expense between 0 and 4 million, a non-GAAP tax rate of 28%, outstanding shares between 142 million and 150 million, and non-GAAP earnings between $0.06 and $0.10 per share.

We expect more than 90% of the quarter's revenue to come from backlog.

For the full year, our targets are as follows, Revenue between 960 million and 990 million.

We have increased the top of our range by 10 million, and the bottom end by 20 million.

Outstanding shares between 142 million and 150 million, a non-GAAP tax rate of 31%, and non-GAAP earnings per share between $0.31 and $0.39, an increase from our previous range of $0.26 to $0.36 per share.

We expect GAAP cash flow from operations to be approximately 200 million.

And over the next four quarters, we expect approximately 820 million of our beginning-of-quarter backlog to turn to revenue.

Thank you for your attention.

We'll now open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] One moment for our first question.

That will come from Rich Valera from Needham and Company.

Please go ahead.

Good afternoon.

Steve, looks like the bookings were pretty solid this quarter, and I know you don't want to really give much in the way of bookings guidance, but could you give us comment at all in terms of any sort of sequential or other types of trends you might expect in bookings, either in the third quarter, or if we should expect a sort of seasonal uptick in the fourth quarter, as you have historically had.

Rich, as you know we haven't been giving forward bookings guidance this year.

I think we're going to stick with that.

Obviously we did have a very good first half.

We execute towards an annual plan, and also in our model, the exact timing of orders isn't quite so important.

But beyond that, I think right now we are in very good shape and going forward, we are not going to give guidance but there is definitely a possibility of continued solid performance.

Fair enough.

The services did seem to tick up a bit this quarter.

Is there anything behind that?

I mean, should we expect that -- any further growth in the services?

Are you kind of -- it sounds like Aart suggests you might be sort of maxed out there in terms of capacity?

We are billing out and working at capacity in the services organization.

The actual amount of revenue that passes through to the income statement in any quarter depends a lot on the timing of deliverables and the receipt back of service logs, so you will see some fluctuations from quarter to quarter.

And I know you don't want to give any guidance on Nassda going forward, but how about -- can you talk about how much is baked into the new guidance in terms of revenue for Nassda?

No.

I don't think I will, Rich.

Okay.

And just one final one.

On the other income and expense you are looking for 0 to 4 million in the third quarter.

Is that a level that we should sort of expect there going forward?

I think that is a pretty stable level, given the current amount of cash we have; and so, absent any other effect on other I and E, and you will see some in the GAAP results actually from the Nassda settlement valuation.

But on a non-GAAP, basis I think 0 to 4 is a pretty stable range.

Okay.

Thanks a lot, guys.

Yes.

Thank you.

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

Please go ahead.

Thanks.

Steve, I was surprised to see the subscription revenue line decrease sequentially after the strong Q1 bookings.

Was there a deal that just rolled off?

Or can you maybe go into what would -- describe the trends there.

Sure.

It is pretty simple.

As you know, prior to this year we had done some deals on a due and payable basis, and one of the deals done last year had a bullet payment due in Q1, which accounts for virtually all the difference between last quarter and this quarter, in the time based license revenue line.

Going forward, that will occur one more time.

You can probably imagine which quarter, but otherwise we are not doing those kind of deals any more.

Okay.

Great, thanks.

And, again, on the services uptick, and you guys sort of running at capacity there, probably a question for Aart.

What do you think that that means for the usability of EDA tools, or is really a complexity issue that customers are running into that they need these additional services?

There is no can question in my mind that complexity is the issue, and so from that perspective strong acceleration in some of the adoption of the new technologies, combined with partially having over-cut their teams in the last three or four years, brings people straight to us.

Now, the good news here is that I think our service team has been very effective at helping a number of customers and so has our support team, by the way.

But the other piece is that with the new pieces of the design flow rolling out, we actually think that we can help in terms of increasing the productivity of our users substantially going forward.

And so we are really trying to be absolutely the leader dealing with this growth in complexity.

Okay.

And it sounds like then you are really helping your customers, teaching them how to fish, not fishing for them, basically.

I like that description and that is exactly the one we often use internally.

It is very much a -- coaching them along the flows and sort of being the pilots that every so often help the big ship come into port.

And so we are very much focused on making sure that we have the highest level of expertise available, because that really makes a big difference for our customers.

And lastly, Cadence has talked about some alternative business models such as a gain share model.

Have you guys thought about alternatives to traditional licenses and whether or not that makes sense for Synopsys?

Well, in general, I think we very much like the tone that Cadence is taking, in terms of focusing on getting value for what we provide as an industry, and we see absolutely opportunities to get much more involved with customers as they move towards much more integrated flows.

And so from that perspective I think the dialogue with customers is gradually changing towards a much higher degree of focus on productivity, on impact, on tapeouts, and anything else.

How this will develop in specific business models, I think, is still fairly open.

Okay.

Thank you.

You're most welcome.

Thank you.

Our next question comes from the line of Jay Vleeschhouwer with Merrill Lynch.

Please go ahead.

Good evening.

This is Yerlie for Jay.

Just wanted to find out, can you give us an idea of how incremental Galileo will turn out to be for the remainder of 2005 as well as 2006 bookings, especially in terms of increasing your average run rate with key customers.

Just for clarification, Galileo was an internal code name.

The product that you are referring to is IC Compiler.

We typically do not disclose the ramp rates of individual products.

However, our own assumption is that over the next three years we will see an upgrade of about 80% of the entire PC/Astro base.

And all indications are, at this point in time, that this is going to go very quickly.

One of the reasons is that the early beta site did very well and got very positive results.

Secondly, that the follow-on requests to get engaged have been large in number, and third, that we are on track for a general availability in June.

So we definitely feel that we are sitting on a winner here, and so from that perspective the upgrade cycle, de facto, has started.

Okay.

Another question.

How would you describe the men [ph] among nonsemiconductor companies, such as Consumer Electronics and other system companies?

It is an interesting and difficult question, because very often the distinction is not always black and white, who is doing what.

I would notice, though, that I have personally seen a number of cases where people doing large number of chips or large volume chips are increasing their investment towards doing a bit more COT design themselves, and I think it is one of the -- it is driven, I should say, by the fact that they want to be on top of the complexity curve and they want to also have a land in influencing design towards a better yield, which is a complex question and this is precisely where we come in with our new tools.

And so I do think that, on the advance side, people are making some additional investment.

Okay.

Can you also describe your technical position, as well as booking momentums in the analog, mixed signal, and also simulation and DFM?

Sure.

That is a large list of products.

As I think Steve mentioned, this was a very solid quarter and, as a matter of fact, literally every business group was ahead of its plan.

And so that includes all the ones that you just mentioned.

Specifically on the analog mixed signal side, we have a very strong position in the verification, be it from the very detailed SPICE capabilities, which did very well this year -- or this quarter, I should say, to the mixed signal.

And there, of course, the addition of Nassda adds another angle and set of technologies.

And then all the way up to the IP fields, where we have also broadened our product portfolio from not just digital cores but analog cores and the combination of the two in complete interface lock, such as USB, PCI and a number of others.

So, across the portfolio strength -- I thought I had already highlighted the fact that DFM stood out this past quarter and one of the highlights, certainly, is that the acquisition of ISE has borne very good fruit, they have very strong technology and very good customer relationships, at the very moment that yields is becoming a top topic.

Okay.

Just one last question.

How will the number of deals, in terms of 20 to 50 million, as well as 50 million-plus deals this year, compare to what you had in 2003, 2004?

Well, one of the interesting things is that with all the new technology rolling out, increasingly we are seeing that the transactions move away a little bit from the just renewal when the renewal is due.

It is increasingly now customers that need some new technology which allows us to do a more even set of renewals.

Materially, this has not any negative impact or positive impact on the revenue because the revenue is very much rolling off of the backlog.

Very stable.

And our main focus is absolutely to increase the run rates.

And so the new technologies are very helpful in doing exactly that.

Thanks, Aart.

Thank you.

Thank you.

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

Please go ahead.

Good afternoon, and Steve, best wishes on your future endeavors.

Thank you.

First question is regarding the litigation.

Can you tell me when the preliminary date for the Markman hearings will be?

Okay.

Hang on.

I'm not sure that a date has been set on the Markman hearings.

As you know, the next scheduled date had been the May 20th hearing on Magma's motion for summary judgment, but today we got word from the court that the judge had rejected that motion almost entirely.

Certainly rejected the motion on the key parts of their case, allowed -- well, on one issue he allowed us the right to amend our complaint and bring it back.

So what was going to be the next event, which was the May 20th hearing, is now not going to occur; and on the issue of statute of limitations, the judge completely rejected their motion.

Okay.

And you don't have any preliminary date for the claims construction hearings then?

No, we do not.

Okay.

And the trial date, I'm assuming, is still set for April of 2006?

Yes, it is.

Okay.

Great.

Thanks.

And then looking at your product segment data, it seems like IP revenues grew by double digits for the second quarter in a row.

Aart, maybe you can tell us what is driving the growth there?

I'm assuming it was your high speed serial cores, but maybe you can add some color.

Clearly, the high speed cores is a center of gravity for our offering, partially because they have become much more complex, therefore more and more people are relying on us; and partially because many more products are using the same interface blocks and actually want to use the same interface blocks because it guarantees good interconnectivity.

And so this is an area that we have continued to invest in and will continue to invest in.

It is also an area that is very helpful from another angle, which is it drives a very sophisticated design and verification techniques.

And so in that sense it really brings design expertise and drives design expertise through our own flows.

And do you think that correlates with what I'm seeing as an acceleration of 90-nanometer design starts?

Yes, indirectly it does, for the following reason, which is many of the 90-nanometer design starts are first and foremost motivated by a desire for a high degree of integration.

If you look at the last few years, going to smaller and smaller geometries, for many years it was driven by just making chips faster.

That has now shifted to making chips functionally much more powerful.

And so the integration implies that it includes many of the interface blocks, and these are precisely the blocks that we offer.

And so we have made a point to make sure that our ability to integrate this IP works especially well with our flows and our flows are very much aimed at taking advantage of high complexity and therefore support 90-nanometer and 65-nanometer.

As just a data point, we asked our users' group meeting that we just had about four or five weeks ago in San Jose what the percentage of designs was of the different geometries.

And 34% of our users reported that they were working on 90-nanometer.

So it gives you a sense that that wave is moving.

Okay, great.

And then one last question.

Looking at your geographical breakouts, Asia-Pac actually grew 26% sequentially after three quarters of sequential declines.

First question is which geographies within that region drove the strength?

What end market applications are the strongest within this region, and do you see this momentum continuing going forward?

The first comment is, don't read too much into quarter to quarter up and down.

But do read a lot in general trends.

And the general trend is very simple, which is if you look at Asia-Pac, which for us is primarily Korea, Taiwan, China, and India, there is no question that this region is growing rapidly from an orders point of view; on a steady state basis they are already the number two region.

I wouldn't be surprised if, on a steady state basis, in four to eight quarters, they would be the number two region from revenue as well.

Now, within those regions, from quarter to quarter there can be big fluctuations.

As you know, Korea has really only a few very large companies.

Taiwan has a much broader set.

China is a very active market.

India is a market primarily dominated by big globals.

And so they are all a little different and they all have their own sort of cycles, but in aggregate it is an area that is definitely growing for us.

And in terms of just the geometry migration, is this region moving from .18-micron to 130, or are you actually starting to see some of the companies making the move to 90-nanometers?

Well, this again is where one cannot see the region completely uniform.

Clearly, Taiwan and Korea are completely on track with state-of-the-art design.

India is now heavily moving toward 90-nanometer.

I would say that China is probably one or two generations behind that today, but is on a very rapid learning curve.

And so in a few years they will all be sort of at the same level.

Today I think I gave you a reasonably accurate description.

Great.

Thank you.

You're most welcome.

Thank you.

Our next question from the line of Dennis Wassung from Adams Harkness.

Please go ahead.

Thank you.

A couple of quick questions, I guess, first for Steve.

On the guidance, sort of the increase on the top and bottom ends here.

I guess the first question is, did the prior guidance already include revenue from Nassda?

No, it did not.

Some element of the increase in the range is a Nassda contribution.

Although on '05 Nassda revenue you should keep in mind -- first, there is a little bit of natural down time between completing a merger and starting to sell.

Second of all, there's a model transition in place, and third, we will lose some of the deferred revenue.

They had about 13 million of deferred revenue on the balance sheet and we would expect to lose about 60 million.

So the Nassda contribution, while there, is not maybe as large as you would otherwise calculate it.

The rest of it is just greater visibility into the year.

Bookings, very strong at the beginning of the year, which -- the early part of the year, which means that in a subscription type environment, you actually get more revenue in the year based on those bookings.

So a combination of a little bit of Nassda and a lot more comfort in looking at the year as a whole is what led to the increase.

Okay, great.

And on the R&D expense, you mentioned you had a big jump because of the earnouts to ISC.

As a result, would you expect to see that number decline sequentially?

Let me check.

I don't know, exactly.

Certainly there won't be a recurrence of the ISE earnout, and I think though, you would generally expect more or less from this level flat R&D spending going forward, at least at plan.

Okay.

And I guess sort of on the ISE side of the business here, looking at the DFM area.

I guess a question for Aart.

It sounds like the ISE products are doing better than expected.

I guess first off, is the -- I guess, what is driving that?

Is it TCAD use expanding outside its traditional applications, are people using it in different areas now, or is it more just increasing transition from one process node to the next that is driving that?

It's a little bit all of that.

I think ISE is certainly doing very well against expectations.

We had high expectations when we acquired the company, but that was especially true also in light of the fact that there was a strong sense on our part that the time for TCAD, for a much more refined yield optimization techniques for, in general, being much more strongly connected to silicon has come.

And I think we are executing well across-the-board on that.

So there is a high degree of interest.

Regarding TCAD specifically, it is clear that with modern -- huge technology, there is many more things that we can do as we move gradually more and more to a three-dimensional simulation.

Just yesterday or the day before I was at a conference with the key technologists with Toshiba, and we're teaming up with them.

And they see great opportunity to work with them on actually improving some of their process optimization in the manufacturing lines.

So I think this is a very open-ended domain where we are very strongly positioned.

Dennis, if I could come back to your question on R&D expenses.

Remember that we won't have the ISE earnout payments, but we're adding roughly 90 -- 80 people from the Nassda acquisition, almost all of whom are all in R&D, and therefore, that will probably take up the gap and that's what accounts for flatness.

Okay.

Good point.

And last question, I guess on the DFM side, for Aart -- on more the resolution enhancement side, OPC and other technologies -- how is that business trending, and I guess when you look at the OPC side of the fence and I guess even (inaudible) side, has most of the decisions been made for 90-nanometer at this point and I guess how would you gauge 65-nanometer decisions?

In general, all these areas that you mentioned are all up.

And there's a good reason for that.

As more designs move to the smaller geometries on a number of the layers, one just must have OPC technology, and I think the utilization is going to continue to go up significantly.

In terms of our position there on the very advanced geometries, we are positioned extremely well.

On the 90-nanometer we are actually growing very quickly.

And so maybe what is most important is that connecting this back up to the place and route capabilities, we provide a continuum, and today the majority of the 90- and 65-nanometer tapeouts go through Synopsys.

Okay.

And last -- one quick one on IC Compiler.

You mentioned you have 12 customers now and limited availability, and I think you've talked about a lot of demand here.

I guess, how quickly -- we talked a little bit about the number of upgrades and a lot of it's happening pretty fast, at least in your expectations.

With general availability in June, how quickly does that number -- that 12 number of -- I guess the number, 12 customers now, is that something that's going to triple immediately, once we get to June or something along those lines?

What's your expectation there, right out of the gate, with the demand level you see now?

Your question is the very same debate we have at our senior staff, how quickly can we ramp up the support for the technology?

From our perspective it is absolutely essential to make sure that all the first customers are very successful.

That makes for the best ramp-ups and therefore we want to make sure that the support teams are well trained and in place.

The good news is that we are training 100 field engineers just this quarter.

And so from that perspective we think that we will be able to be very responsive to almost all the demand, but a fast ramp-up is a fast ramp-up.

The good news is I think we have one of those and we will execute I think quite well.

Thank you and I guess I'll share my best wishes for Steve there, on your next endeavor.

Okay.

Thanks, Dennis.

Thank you.

Our next question comes from the line of Raj Seth from S.G. Cowen.

Please go ahead.

Hi.

Thanks very much.

First, Aart, a couple for you.

You are obviously somewhat reluctant to give bookings targets, forward bookings targets, which I guess is understandable.

But I wonder if you could talk a little bit about what you think the industry grows perhaps over the next 12 months, what is the growth outlook of the industry and given -- I'm assuming you think it is going to grow somewhat -- and given the past couple of years of effectively no growth, why all of a sudden does it start to grow?

I'm also -- Let me not have words put in my mouth.

I think part of the reason that we are a bit reluctant to communicate much about orders growth, leaving alone the fact that last year we didn't do particularly well on that topic, is the very fact that the behavior in the market is very interesting, in that I think there is a transition towards much more integrated flows and a certain degree of consolidation.

And so the EDA behavior of the industry is actually a hard one to predict.

I think we are doing particularly well right now in this change.

Secondly, it is also clear that the semiconductor industry around us, although feeling reasonably solid, is not particularly hard pressed to make strong predictions right now for this year.

My own sense is that semiconductors is going to remain very solid this year.

I don't expect any big down.

But the degree to which it can go up is still fairly unknown.

And so it feels fairly solid for us.

And aside of that, I think actually making sharp predictions is not very easy.

So let me make sure I understand.

If the semiconductor industry grows, I don't know, mid to high single digits, would it be your expectation that EDA grows along those lines, or are you suggesting it is just too hard to tell, given the inflection point we are at?

No, actually -- thanks for asking it that way.

Yes, it would be my expectation that EDA would grow solidly with semiconductors, largely because -- all of the comments we've made before.

Complexity is absolutely hitting home all over the place.

Design has now moved to the 90-nanometer.

In many ways, the semiconductor investments have been made already a number of years ago, meaning the technology development for 90-nanometer, the equipment purchases for 90 and 65, so that's all in place.

And so it's now the design train that is starting.

Therefore I think there will be a shift of investments among the semiconductor budgets towards EDA.

The amount of that is somewhat unpredictable because simultaneously, the semiconductor vendors are relooking at their design flows and potentially consolidating on fewer vendors.

We think we are very well positioned in that, but it makes it a little bit difficult in aggregate to predict.

One more comment.

I think it's very clear that the connected adjacent domains of IPN/DFM have the potential to grow well, and this is especially visible in DFM for us right now.

A couple more, if I might.

On the cost side of the equation, Steve mentioned that you were taking a look at actions that might help raise leverage in the model, but also mentioned, given the rollout of some of these new technologies, that you wanted to make sure that you didn't in some way underinvest or throttle the potential success of these new products.

What -- how do I read that?

Are you waiting until you get over the initial rollout of these projects to make a decision about what you do with the cost structure?

Are you waiting to see what the bookings trajectory looks like two quarters out?

When might you make a decision on the cost side of the equation?

We actually are not waiting.

We are very proactive right now, looking at all the areas where cost efficiency could be gained, and that includes stopping things that are not going anywhere.

But most importantly, really systematically moving to lower cost geographies as the needs grow there anyway.

And so the question of cost management, and simultaneously active globalization, is actually quite strongly linked because many of our customers are growing more rapidly in some of these other regions, and so that is a natural pathway to be on anyway.

Having said that, yes, we are careful in making the tradeoffs because we do feel that we are sitting right now on strong technology momentum. and as you well know, this has been, after having had to spend a few years focusing just on the alignment, the correlation, of all the products, ever since the rollout of last summer and most definitely visibly so with the rollout of IC Compiler, we think that we are fully back in high technology mode and the R&D engine is really cranking.

And so that begs the question, how can we maximize that value at this point in time and support is a key ingredient to that.

Great.

One last quick one.

Last night on Applied's call, Mike Splinter, the CEO, when discussing foundry weakness, talked about issues in transitioning design at 90-nanometers.

Design-related issues, specifically pointing to what I'm assuming when he was talking about verification, this physical verification issues.

Not sure if you heard that.

Any perspective on what they might be talking about?

I didn't hear his specific comments, but I can give you a little sense that we are starting to see definitely differences between the different providers of 90-nanometer solutions; and some are doing very well, and others are having a hard time with yields.

We don't want our customers to not do well, but I can tell you, people that have a hard time with yield is a big opportunity for us and it comes from two angles.

From the FM (ph) tools specifically, but also very much from the alignment of our flow towards these implementations.

And so I think the other comment is -- is related to my previous remark, which is that I think a lot of the investments for 90-nanometer and 65-nanometer from a manufacturing point of view have been put in place and are being rolled out and are coming online.

And so now the reality hits the fan, so to speak, meaning that designs have to yield.

There is quite a bit of disparity between how well some semiconductor players do versus others.

I think it will realign quickly.

But we will be very instrumental in that.

Okay, thanks.

You're most welcome.

Thank you.

We do have five minutes.

Actually four minutes left to the end of the call with three questioners in queue.

Our next question will come from from Erach Desai from American Technology Research.

Please go ahead.

A couple of questions.

Steve, I'm surprised no one has asked this so I'm just going to try and understand it a little better.

You mentioned, or you quantified, a litigation settlement related to outstanding litigation against Nassda.

I'm trying to reconcile.

You guided non-GAAP EPS to $0.06 to $0.10, which includes $0.21 to $0.23 of charges.

I just want to take out the nonrecurring part out of this.

How should I look at that?

Can I add $0.21 and $0.23?

I'm sorry, Erach.

The litigation settlement would happen in Other, would come in Other I&E.

And I didn't catch the first part of your question.

Are you talking about Other I&E or revenue?

I'm just looking for the reconciliation which shows GAAP earnings range -- this is for the July quarter -- of $0.08 to $0.12, and typically one would expect non-GAAP to be higher.

Okay.

Right.

Okay.

So the litigation settlement which contributes to GAAP earnings will be removed from Other I&E for calculation of the non-GAAP earnings.

And the valuation of the litigation settlement is quite large.

I'm still trying to get to what would be -- so non-GAAP would not include litigation?

Non-GAAP would not include litigation.

Yes, would not include the litigation settlement from the Nassda case.

Okay.

I'll have to take it offline.

Why don't we take it offline.

Yes.

Rather than take everybody's time.

Let me get back to my sort of core set of questions.

Would you perhaps be able to tell us whether bookings grew sequentially if you excluded that large renewal in North America that you did in the fiscal first quarter?

I will not be able to tell you that.

But you should be able to figure it out for yourself. [LAUGHTER]

The other item -- the other question I had was -- I think you clarified the R&D issue well, especially with Nassda rolling in as an incremental expense.

Did you quantify how much of fiscal second quarter R&D came from the ISE earnout?

I did not.

And I don't know that we'll break that out.

Okay.

I'm striking out here.

And finally, on the litigation side, I mean obviously you stated your position, apparently Magma has a press release that claims victory also in the judge's ruling, so we'll have to sort that out.

But perhaps you could add some color, Steve.

There seems to have been a little bit of a hot potato on the case.

A couple of judges recused themselves from the case, et cetera.

Can you provide us any sense of what was going on there or what happened there?

Yes, I'm not sure that we have any real insights into why they recused.

And so --

But it's basically -- like a ping-pong ball, went back and forth a couple of times, right?

Yes, evidently we have the same judge.

I haven't focused on who the judge is, I'm sorry.

Okay.

Thanks.

All right.

Thank you.

Our next question comes from the line of Tim Fox with Deutsche Banc.

Please go ahead.

Hi, thank you.

Just a couple of quick follow-ups.

Aart, maybe, you had mentioned bookings upside that came from several different product areas.

I was wondering if you could comment on the pricing environment.

Given the more ratable model, were you able to command better pricing without the 11th hour issues around doing orders?

In general, we didn't have any 11th hour issues.

We did see that pricing pressure did go up a little bit.

There is variability from one quarter to another, and our sense is that actually we are entering a little bit of a different phase of companies now moving towards fewer suppliers, so I wouldn't be surprised if some of the people that see dangers of being factored out will be very price aggressive.

In general, though, we feel very good about the bookings that we did get in, and so our objective is very clear.

It is to be the preferred vendor with the customers that want to bet on us.

And just lastly, were bookings up year-over-year?

I'm not going to ask Erach's question about sequential, but on a year-over-year basis, were orders up?

I think that is something else we're not going to talk about.

Okay.

Thank you.

That's all for me.

You're welcome.

Thank you.

And our final question from the line of Todd Peters with American Century.

Please go ahead.

Thank you.

My question has been answered.

Well, in that case that concludes our call.

We appreciate the time you spent with us.

Steve and myself will be available as usual for questions afterwards.

Have a good afternoon and evening.

Goodbye.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation as well as for using AT&T's Executive Teleconference service.

You may now disconnect.