新思科技 (SNPS) 2006 Q1 法說會逐字稿

Welcome to the Synopsys earnings conference call for the first quarter fiscal year 2006. [OPERATOR INSTRUCTIONS] At this time I would like to turn the conference over to Lisa Ewbank, Pres---Vice President of Investor Relations.

Please go ahead.

Thank you, Leah.

Good afternoon everyone.

With us today are Aart de Geus, Chairman and CEO of Synopsys and Brian Beattie, Chief Financial Officer.

During the course of this 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 the call, important factors that may affect our future results are described in our quarterly rep---in our annual report on Form 10K, which is on file with the Securities and Exchange Commission, and in our first quarter fiscal year 2006 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 nonGAAP financial measures to their most directly comparable GAAP financial measures can be found in our first quarter earnings release and financial supplement.

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

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

Good afternoon, and thank you for joining us.

I am pleased to report that our Q1 of fiscal 2006 was another very solid quarter from three perspectives.

First, business came in notably above our targets driven primarily by digital implementation, design to manufacturing and functional verification.

Second, our technology is very strong and winning business.

We continue to have excellent success in technical benchmarks, we see more evaluations and customer adoptions and there is visible momentum with our new products.

Third, we executed very well against our financial goals.

We met or exceeded all our financial targets and we're making steady progress on increasing our [profitability] and with the experience and perspective of our new CFO Brian Beattie, we are poised to drive the Company to the next level of execution.

Let me begin with some financial highlights.

Revenue was $260.2 million at the high end of guidance with nonGAAP earnings at $0.18 per share exceeding our target range due mainly to the timing of some short-term items.

Operating margin was higher than planned at 14.4%, giving us a good start towards our 2006 annual target off 12% to 13% and our stated 2007 target of 20 plus percent.

We continue to have the most predictable license [loan] in the industry with Q1 one up-front orders at just 6%, and our balance sheet and cash flow are strong.

Let me move on to our [page two] of business starting with the overall environment.

The [inaudible] landscape remains solid.

Our chip integration is increasing driven mainly by the cost imperative of consumer products.

Also increasing is the quest for higher speed and lower power.

Those factors, plus growing design complexity fuel the need for more sophisticated EDA Solutions.

All of these trends have a positive implication for Synopsys.

Our customers are driving for performance, productivity, and predictability.

These three drivers are the guiding principles behind Synopsys technology and support making us a valuable partner.

One recent example was a very large consumer electronics company which shows us as a preferred vendor consolidating its implementation and verification solutions on Synopsys.

In Q1, they made a large multi-year commitment to us with built-in future growth.

We are helping them move their design flow to 65-nanometer with a strong emphasis on low power.

They are also rapidly adopting our latest verification technologies.

They plan to fully benefit from our integrated design flow.

The three guiding principles of performance, productivity and predictability merits some additional comments.

Chip, or system, performance is vital to our customers.

At the end of the day if you can get the power or the speed you need you can go to market.

That is why the most demanding chips in the world today are largely done with Synopsys.

Productivity, measured in both design and manufacturing efficiency, is more important than ever due to the increased focus on cost.

In the last few quarters we have delivered quantifiable productivity improvements to our customers.

Lastly, predictability is crucial.

For customers it means meeting or missing their short-term windows.

Let's look at how these principles benefited our business in Q1.

First, our galaxy implementation platform was again strong and came in above target.

IC Compiler had impressive performance and productivity gains; 8% to 10% better timing, area, and power and 40% to 50% faster time to results.

The impact is already visible.

Multiple pay files were completed including a multi-cord ESP system on chip for a telecom application [inaudible], and an ultra low power version of ST's nomadic multi-media processor.

As announced this morning ST is now deploying IC Compiler on advanced 65 nanometer multi-media designs.

In addition, more [kpowers are] already in the pipeline and we have now have active evaluations or adoptions at nearly all of our top customers.

We are leading the majority of our implementation engagements with IC Compiler and field support and physical design is at maximum capacity.

In other words, our product ramp is well on track.

In synthesis, our new design compiler is driving gains in predictability with layout correlation within 5% to 15% and in performance, with 5% to 10% better timing.

In its first full quarter of availability, DC is winning benchmarks and has already seen adoptions by several leading customers.

Our unique capabilities in low power continue to drive business.

With the industry's first comprehensive multi-voltage flow, our customers have successfully completed a dozen low-power high- end tapeouts.

During the quarter we joined UMC in announcing and 90 nanometer reference design flow optimized for low power.

Based on galaxy, it not only addresses leakage pile challenges but also provides advanced yield enhancements.

Designs of 65-nanometer and below require advanced solutions, and the number of customers are aggressively moving to those geometries.

At this time we're tracking 161 active 16 nanometer designs and tapeouts have more than doubled since last quarter with 52 to date.

The majority of those tapeouts use Synopsys physical tools.

Verification, low power and yield optimization are the key success factors that led customers to Synopsys as their partner of choice.

Now, to manufacturing where we have another excellent quarter.

Business was notably above planned.

Customers recognized both the breadth of our solution and our unmatched roadmap to create a bridge between design and manufacturing.

As the necessity of this bridge and advanced designs becomes clear this new growth market has become an important part of our business.

Our unique position is making a difference in our technical and business engagements.

In mass optimization our leading-edge proteus customers expanded their installed bases as their 65 nanometer volume production ramped up.

NEC adopted our mass technology to produce its high performance 65 nanometer processor and logic chips.

Our run time improvements are enabling success at 45 nanometer competitive evaluations.

In the process area, TCAD did very well.

Synopsys is the leading choice for development technology and manufacturing predictability.

The newly integrated Centura solution provides superior modeling to help customers like Toshiba and Fairchild improve their productivity.

Finally, in Q1 we closed the acquisition of HPL.

HPL brings us a small but exciting piece of the puzzle.

Test chip technology that allows us to calibrate our entire flow with manufacturing reality.

The integration is going very well and we are already seeing pull-through to our other products.

Discovery, our verification platform, had another strong quarter driven by both digital and analog mixed signal.

Both came in above plan.

As many of you know we have been investing for several years in next-generation verification with support for systems analog.

The [inaudible] of language is more efficient than previous generations resulting in better productivity.

Synopsys solution, which combines systems analog with other languages, as well as with simulation and native test bench technology, has 5X faster performance and is winning every head to head benchmark.

More than 150 customers have already adopted our solution including AMCC, which is a global leader in network and embedded power pc processing.

We saw [inaudible] utilization growing rapidly in 2006, putting us in a strong position to lead the next wave of verification productivity.

Now to IP and services.

As customers move to larger, more complex chips, IP reuse is becoming even more important.

Using high-quality commercial IP blocks improves customer productivity and reduces risk.

As a result, analysts predict higher growth in IP than in the core EDA sectors of implementation and verification.

Over the past several years Synopsys has developed a most comprehensive portfolio of high-quality digital and analog connectivity IP especially cores like USB and PCI express.

Our USB family, of course, is very strong with one consumer electronic company recently using up it's large USB pool faster than anticipated and signing up for substantial replenishment.

We continue to expand our portfolio including analog IP.

For example in December we announced new multi-protocol analog cores for tiers in season X's, 90 nanometer and 130 nanometer processes.

Our PCI express solution, which includes both digital controllers and analog [side] is the first production ready [sci] IP to gain official certification, for TSNP's 90 nanometer process.

And, last [month] we launched a new USB 2.0 nano file which provides the industry's best combination of low power and smallest area optimized for yield.

This is analog IP core is aimed at embedded mobile, portable and low power applications.

In services a noteworthy highlight was the completion of three, 65 nanometer designs for wireless handsets and consumer wireless chips.

Our service offering focuses on state of the art design so it is highly differentiated and in demand.

We actually had to push some business out of Q1, because we were at high utilization rates.

In conclusion, we had a very strong quarter on all key measures.

Business was notably higher than target, our technology was very strong in performance, productivity, and predictability, and we executed well on our financial goals.

With that, I am pleased to turn the call over to Brian for the financial update and guidance.

Thank you, Aart.

Let me start by saying that I am very happy to be part of the Synopsys team and look forward to helping drive the Company forward.

Now let's look at the quarter's results.

As a reminder I will be discussing certain GAAP and nonGAAP measures of our financial performance.

We have provided a full reconciliation in the press release and financial supplement posted on our website.

As Aart mentioned we had a solid quarter in all respects.

Beginning with revenue.

Total revenue for the quarter was $260.2 million, an 8% increase year over year and the fifth straight quarter of revenue growth.

Our revenue mix remains quite stable with licenses at 84% and services which includes maintenance and consulting at 16%.

License revenue was split 96% ratable and 4% up front.

The increase in ratable revenue was driven up in part by approximately $4 million from one contract that was recognized on a payment terms basis, similar to Q1 of last year.

As expected greater than 95% of Q1 revenue came from beginning of quarter backlog.

From a product perspective, 78% of revenue came from our core Galaxy design and discovery verification solutions. 17% came from our IP and manufacturing businesses and 5% came from professional services.

Geographically, quarterly business varies primarily due to customer mix, more so than the underlying economic strength of the region.

Having said that, Japan was definitely the strongest region in the quarter in terms of orders.

Revenue distribution remained stable with 54% from North America, 16% each from Europe and Japan, and 14% from Asia Pacific.

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

GAAP earnings for the quarter were $0.01 per share with expenses totaling $258 million.

GAAP results include $17 million of amortization of intangible assets, and $18.4 million of stock based compensation expenses in compliance with FAS123R.

NonGAAP earnings per share were a solid $0.18 reflecting our continued focus on operational discipline and the benefits of some one time expense impact.

Q1, nonGAAP expenses of $223 million, decreased 6% sequentially and where notably below planned, reflecting timing related items associated with very high Q4 business levels, vacation associated with the holiday shut down, and delayed hiring.

Q1 also saw positive currency impact of approximately $1 million.

Other income net for the quarter was less than $1 million, a sequential decrease due primarily to pre-funding of our charitable foundation.

The nonGAAP tax rate was 31%.

We continue to execute well on contract mix with 94% product orders in the quarter both with time based licenses and only 6% booked up front.

The average length of our renewable customer license commitments remained very healthy at approximately 2.7 years.

Now turning to cash.

Operating cash flow was approximately $20 million in Q1 reflecting the expected payout of fiscal 2005 commissions and bonuses.

Capital expenditures were approximately $8 million.

Cash and short-term investments totaled approximately $514 million, an expected decrease from Q4 driven by stock repurchases and payout of the 2005 commissions and bonuses.

We also repurchased 3.9 million shares of our stock during the quarter for $81 million, at an average price of $20.92.

We have approximately $355 million left on our authorization and will continue to evaluate the best use of cash each quarter, including Company operations, investments, and stock repurchases.

Q1, net accounts receivable totaled $84 million, an expected decrease from last quarter driven by very good cash collections and some cyclicality.

DSOs were excellent; they came in at 29 days, down from 36 days last quarter.

Deferred revenue at the end of the quarter was $514 million, a substantial increase sequentially due primarily to a large customer paying a year in advance.

And, that payment will roll off of deferred revenue throughout the year.

Headcount totaled 5,079 employees at the end of Q1, a sequential increase due primarily to the HPL acquisition and continued additions in lower-cost geographies.

We expect this continued globalization to result in lower cost per employee in 2006.

Before I turn to guidance I wanted to spend a moment on my initial priorities and actions.

I have been on board now for about five weeks and during that time have gained confidence in the great team, very predictable business model, and the Company's future.

My priorities for the first 100 days are number one, to get a good handle on the financials and expectations going forward, number two, to analyze the operations of the Company, and finally to focus on cost management within Synopsys.

All three are off to a good start.

In particular we have already put in programs in place to drive improvements in operating margins from 7% in 2005 to 12% to 13% this year.

We're on track to driving further improvements to 20 plus percent in 2007.

Now, looking forward to Q2 in fiscal 2006.

In general we expect modest sequential quarterly revenue growth through the remainder of the year with costs and expenses for the year flat to slightly up from 2005.

At this point, R&D and sales and marketing expenses are expected to increase to a more typical level in Q2 with G&A declining slightly through the year.

For the second quarter our targets are revenue between $262 million, and $270 million, total GAAP expenses between $263 million, and $276 million, which includes approximately $18 million of stock compensation expense.

Total nonGAAP expenses between $233 million, and $243 million, other income and expense between $0, and $4 million, a nonGAAP tax rate of 31%, outstanding shares between 144, and 150 million shares, GAAP bottom line results of a loss of $0.02 per share to a profit of $0.03 per share, and nonGAAP earnings of $0.13 to $0.17 per share.

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

Now for the full year.

Our nonGAAP targets are unchanged.

While GAAP EPS changed slightly to reflect the HPL acquisition.

Revenues between $1.055 billion, and $1.085 billion, a nonGAAP tax rate remaining at 31%, outstanding shares between 144, and 150 million, GAAP EPS between $0.05 and $0.17, which includes the impact of approximately $68 million in stock based compensation expense, and nonGAAP EPS between $0.65, and $0.73.

We continue to expect cash flow from operations to be greater than $175 million for the year.

Over the next four quarters we expect approximately $890 million of our beginning of quarter backlog to turn to revenue.

Finally, more than 85% of our revenue for the remainder of fiscal 2006 is already committed.

In summary I am excited about the Company's outlook going forward.

And with that, I will turn the call to the operator for questions.

[ OPERATOR INSTRUCTIONS ] Our first question is from the line of Rich Valera from Needham and Company.

Please go ahead.

Thank you.

Good afternoon.

Aart, can I assume that your comment about business being ahead of plan is essentially talking about booking?

It is, it is talking about booking, it is talking about pretty much all of the other metrics as well.

Obviously we make the plan for the year and against that plan we did well.

From that perspective it feels pretty good.

Great, and it sounds like in your three major product categories your -- your, I'll say probably your bookings were ahead of planned but you kept the full-year revenue guidance unchanged.

Is that just sort of conservatism because we're still early in the year?

That is exactly right.

This is the first quarter, the first quarter tends to be a little bit after the big Q4 and our sense is typically we try to not change any plans after the first quarter.

We look at things after Q2.

And with respect to IC Compiler, in the past you have been asked how this compares to the physical compiler, the PC Astro upgrade cycle, I guess you didn't really have very detailed information.

Is there any comparison you might care to take at this time in terms of how this might compare to that PC Astro upgrade cycle?

In general it feels like a very solid upgrade cycle, meaning that----maybe we have just gotten a little bit better over of the years in terms understanding the quality level, understanding the differentiation of the new product versus the old ones but also understanding how people gradually migrate.

And so the migration is well on track.

You may recall that, I think about three or four quarters ago we told you our estimate was that 80% of PC Astro would migrate over in the 3-year period; we are still very much on track of that and at this point, the evidence that was visible early on of both performance improvements and, most importantly, productivity improvement is holding true very much so and, I think, we are on a good quality track.

Lastly, the other observation is we had, I think, mentioned to you that in Q1 we would roll out already the next version of IC Compiler, that that version would be more complete in replacing the combo PC Astro---that was executed like clockwork.

So, that really went out on time and from that perspective, people can start migrating to completely move over from PC Astro while at the same time PC Astro itself is doing well because all the advanced chips have been delivered with that combo.

And just one more.

On the share count, Brian, what was the ending share count for the quarter as opposed to the average share count?

Let me just see here.

We are at 146969.

Great, and I noticed you bought back almost 4 million shares, your average share count still went up by pretty---by almost 2 million shares, do you have a sense of the profile of the options going forward, in other words, if the stock goes up to say 25, do we have another 6 million shares of options?

Do you have any feel for how that -- how much sensitivity there is to stock price with respect to the options that will come into the diluted share count?

Yes.

We're looking at that.

The share count did not increase significantly from one quarter to the next.

Clearly, there is going to be a little bit of a minor creep up in the way the fully diluted share count is included with the price increasing that therefore there would be more of the stock in the money, more of the options in the money and using the Treasury method, we would see a higher number of fully diluted shares outstanding.

Okay.

Thanks.

Next question is from Harlan Sur from Morgan Stanley.

Please go ahead.

Thanks, good afternoon and nice job on the top line in expense controls.

First question for you, Aart, semi industry EDA's [under] consolidation appears to becoming more pervasive and the large consumer electronics customer you mentioned is a good example of that.

In this particular instance, I was just curious, maybe you can tell us how many EDA suppliers they currently support and how much they hope to pare that back by.

Well, you know the answer always starts with: they support everybody.

All of the large companies have somewhere, somebody who spends some money in a more less controlled fashion and sometimes it's for very good reasons because a competitor may have something that is useful.

Typically, what people would like to do is to reduce the number of suppliers.

They are not always completely committed to go to a single supplier just to make sure that we stay on; that is sort of their terminology.

They are very much driven by productivity increasingly rather than just by cost savings.

For those cases, I think it will typically go down to probably about two players.

Okay, great, thanks.

And then on the manufacturing front I have been hearing a lot of discussion from the semi companies about the need for better processing needs, a better process to transistor, process to correlation is especially at the technology [nodes] below 90 nanometers.

I was just wondering how does the [enforced] platform that you talked about take advantage of this opportunity?

I think it is not a surprise that for the smaller geometries, there needs to be much more correlation and the correlation has multiple dimensions, but it starts immediately with timing because if you can't predict your timing well, then your chips are not going to work and so that it is what driving things to design.

But [Hauer] is right behind that because the two trade off.

The other thing that is interesting is with the smaller geometries, a degree of variability to all of those numbers is impacted by your yield objectives.

And so, where Centralis falls in is that it helps people really simulate not only their process but also the devices being built at these geometries and there we are already involved in 32 nanometer, for example, which is still far away from design.

But is being optimized right now.

Lastly, I would highlight HPL acquisition as a very nice way to bring together simulation which is really the calculation of what is going to happen with the chip testing that allows us to correlate as well with the actual physical reality.

All of that adds significantly to the degree of confidence that people can have using Synopsys tools [as if] being able to predict what is going to happen in manufacturing.

Okay.

Thanks.

And, I guess along those same lines with regards to the HPL acquisition, I know that there was another product segment; you mentioned the test chip solutions, you also had some yield analysis software, I'm just wondering is the synopsis going to continue to focus on the yield analysis software, or are you just going to redirect those resources to other projects?

It is a mixture of the two.

We have worked well with other companies like PDF that are very strong in that area.

I think we provide very much a continuum with folks like that.

We are very much interested in all of the yield issues that pertain directly, of course, to the design flow.

Some of that we will absolutely continue, others we will tune up.

The HPL acquisition was first and foremost centered around sort of closing the loop on yield all the way from the design tools to the hard core manufacturing.

Okay.

Thank you for that.

And then my last question is for Brian.

With the increase of total expenses year, in Q2 going up to about $238 million at the midpoint of the range, how much of that is related to the headcount additions from HPL, and again if you can remind us starting from Q2 how do you expect the OpEx to trend for the remainder of the year?

Okay.

Good question.

Overall for the year as we look at the 2006 spending we're seeing that the costs are pretty well flat, to just slightly up for the year.

What we see in Q2 is a really a point where it peaks out in the second quarter, Q1 came in light on spending given the profile we had in the fourth quarter, leading into the first, and then Q2 is forecast to be a higher level of spending just taking into account full-year expenses and compensation increases and so in that were put in place last year; and from that of point on throughout the balance of the year we're seeing expenses again flat to slightly down.

So, again, recommitted on a operating margin level from 12% to 13% for the year.

So, again, with revenue visibility and the expense profile we've got in place the Company is committed and the team is committed to driving the operating margin, of almost doubling year over year.

The HPL the headcount addition, is that a minimal impact to OpEx?

It sure is.

It is not a significant impact to the operating expense for the year.

Okay.

Great.

Thank you.

And our next question is from the line of Stuart Muter from RBC Capital Markets.

Please go ahead.

Yes, this is [Heshton Emedia] for Stuart Muter.

I just would like to follow up on that vendor consolidation question.

If you netted on to two vendors and---because of the complex software, you think it is likely that a customer would choose just one supplier -- I guess, across the customer spectrum, somebody chooses just for all of the complete solution end to end other than kind of mix and match of different solutions?

[Inaudible] There is no simple answer to that partially because every customer has a very different profile both in terms of sometimes their needs and certainly in terms of their history.

What is clear is that from a productivity point of view and because of that related cost point of view there is substantial benefit in making sure that many of your tools work extremely well together and are orchestrated to truly reduce the amount of effort it takes to finish a chip.

And that is, in perspective of [BDA] industry, relatively new.

For many, many years, we were in a scene that was very much competing just on point tools; point tools are still important, but from a productivity point of view the overall solution is clearly now the bigger factor.

From that perspective I think we're going to see an increase move to fewer vendors.

Does that mean that there won't be some individual contributors that provide some of points of opportunity?

Probably always a number of those but the majority will focus on key relationships.

On that front can you talk a little bit on your product portfolio if you were to position as a complete solution which piece of your puzzle is weaker and you need work and what you're doing about it say, versus visible flow versus custom flo or even visible flow-----physical layout tool, can you just go over a little bit and see where we need some work?

Certainly.

Starting with some of the highlights, obviously from advanced digital flow we feel that we are in a very strong position because we cover every piece extremely well all the way down to deep manufacturing and therefore can optimize for yield and are well-positioned for the smaller geometries.

The area of that I think we still need to put more effort in is custom design and in custom design there, on the verification side we are actually doing very, very well, in our verification solution to, be it on the digital side be it on the analog side or be it on the analog mixed signal side, is very strong, and last quarter was again ahead of planned so doing well.

That leaves the area of custom implementation where there is strong competition and over time you will see us do more.

Last but not least, looking upwards towards the systems side, we also have a set of very unique capability, specifically in IP some of the services, some of the system tools that allow us to have a much better understanding of what people do with very large chips.

The set of puzzle pieces as we look at them has been accumulated to be complete and has been optimized to be well connected and that is where the terms productivity and predictability are absolutely ones that we shine at.

I don't know if you can take a guess at what percent of the customer currently are using 80%---80% of more or one solution, you referred to one consumer electronics customer, what would you think that percent is in, and what do you see that trending for the next five years?

This is an extremely difficult question largely because the number of customers try to obfuscate that picture.

We've had a number of customers that have aligned more and more with us and don't necessarily want the rest of the world to know because in their transitions they when the other competitors to keep supporting them.

I think it remains to be seen how quick that shift is going to occur.

What is clear to me though is that as we can demonstrably illustrate the productivity benefits in measurable fashion, higher levels of management are clearly trying to drive towards picking a vendor that they can build on for the future.

That also connects well to the silicon and has a perspective that allows them to be very complex chips.

And our next question is from Dennis Wassung from Canaccord Adams Research.

Please go ahead.

Thank you.

A few questions.

First, you talked about the operating margin target going out to fiscal 2007 being the 20% plus range.

I just wanted to confirm that's for the full year and not just to reach it at some point during the year.

We have not confirmed that.

We have said during the year.

We will see where we end up.

Right now, we are on a very good track, I think, of pushing an ops margin.

One of the things that we have been careful with is to try to commit strongly to things that we saw a clear pathway towards.

What you should hear from my words is that maybe more than in years past we have really focused on this as one of the core competences of the Company, and with Brian on board we can push even more in that direction, so I feel comfortable that we are heading in the right direction.

Okay, and I guess for---I guess sort of a follow-on there---do you, in terms of a revenue growth expectation, do you see---do you see a certain level of revenue growth that you need to get there or is the commitment sort of to take care of on the cost side of the equation regardless?

It's really a combination of the two.

Clearly with the backlog that we have, and you may recall that we communicate that once a year and that was last quarter of over $1.9 billion, we have very good insight as to what the revenue ramp looks like.

That is one of the components.

The other component is that we are actively looking at how to manage our expenses really well.

The combination of the two give us a higher degree of insurance that we're well on track so far.

Okay.

Great.

And, a quick question on the pricing environment---the credit and pricing environment.

How has that changed?

Has it gotten any easier or any better, easier is probably not the right word, but are there any areas that you are seeing that are better or worse than others?

It has been remarkably unchanged for our product.

I cannot speak about the other players, but we track it carefully and it has been relatively unchanged.

It can vary a little bit obviously from deal to deal and from quarter to quarter, but it really hasn't all that much.

Okay.

And last quick on sort of a broader environment question.

You talked about some strength in the semiconductor industry and obviously you guys have a good outlook here and a better quarter than you had expected, are you seeing any material change from your customers on a broad sense, willingness to spend more, R&D budgets changing at all, or is it just technology is driving requirements for new technology here?

I am seeing more of a gradual evolution from a overall landscape point of view it feels to me like it continues to be solid---in '01, '02 people learned the word caution, but at the same time they have also learned how to manage the overall inventory chain better, have earlier warning systems, and so what I hear from all the semiconductor execs, on average, is for the next six months they see actually reasonably good solidity going forward.

I think that the other thing we are starting to see is that a number of people have decided to move forward on their 65 nanometer [bath] and a number of people have actually said and communicated they want to move rapidly to 65, because it gives them an opportunity to integrate more functionality and therefore either reduce costs on things that are very high functionality or create some additional differentiation.

And that is driving the need for tools and specifically the needs around low-power are very, very visible.

I expect that as these products go into volume production they are also going to increase the emphasis on yield because that materially impacts the bottom line.

Great.

Thank you, Aart.

Next question is from Raj Seth from SG Cowen and Company.

Please go ahead.

Hi.

Thanks for taking my question.

First, Aart, just a follow-up on the 65 nanometer comment.

Is there a period during which many of the critical decisions on toolset is going to be made?

What time frame are the leading customers making those decisions within?

The decisions are sort of gradual but invariably tied to the---some of the leading chips.

The pilot chip may be a way to evaluate things but the first chip in a series---let's say a DSP core that has many derivatives, tends to set the tone for what tools are being used and I think a number of these decisions are being made as we speak or have recently been made.

So, people try to be careful in that because transitions are always risky just because they are transitions.

What is good for our position is how well PC Astro has been doing because PC Astro has been able to accommodate everyone of the 65 nanometer needs, the additional rules, the yield optimization, and so we're looking--we are looking at IC Compiler as really a bonus on top of a product set that is actually doing very well for these advanced designs.

Do you have a sense yet how much a fully loaded, at 65 nanometers, how much more that cost the customer than what would be required at the previous node?

It's a good question.

I don't think that I have a very firm sense of that.

It's actually because they are multiple pieces are moving.

I think on the basic implementation side, it is probably not dissimilar to what they were spending before, but they are achieving clearly much more work with it.

On the verification side, though, there is dramatically more functionality that goes on these chips and therefore we think that it will drive the utilization ramp of advanced verification tools substantially.

Lastly, towards the DFM, much of that often falls into a different budget and, therefore, is not necessarily visible to the---to the design team and there is the opportunity to have economic impact while addressing something that is in, typically, very large budgets and therefore wouldn't hit the worry meter too much for them.

Thanks.

That's all for----Brian, if I could, one for you.

I think you bought back 80 million or so this quarter in stock; you are starting to generate on a pretty good base already, strong cash flow again -- philosophically how do you think about buy backs, is that a level you'll try and maintain going forward, might you consider a dividend, how do you think about uses of cash here?

Well, good question.

We were pretty aggressive in the first quarter with 3.9 million shares bought back and we spent about $81 million, so that was the first start to the program.

As you know we have still $355 million left in our authorization that we're looking at and we have to evaluate each quarter on where we're spending our cash, looking at obviously investments in areas of M&A and the operations itself and also to the extent we look at share repurchases as well.

One more if I might.

In a model like yours where you transition to a year ago to fully---- roughly fully ratable model.

You ought to, as you move forward, begin to see just from the layers of backlog accumulating---- I would think revenues ought to be able to grow faster than bookings.

Is there any way that you can help me think about how to model that affect your---- how much more than bookings in '07 timeframe might you be able to grow given that mechanical subscription model leverage?

Well, one of the things that we obviously communicate is the backlog at the end of the year.

That gives you very exact perspective of where we are with the bookings.

However, what it does not necessarily tell you exactly is how long are the bookings over time.

We disclosed that, I believe, every quarter so that gives you quite a bit of insight that, I believe, so we're not sending the wrong message on bookings growth and that that is obfuscated by just having longer period deals, for example.

Lastly, internally we look, first and foremost, actually at making sure that we grow their run rates with our customers and so far, so good in that department.

So, those are sort of the indicators that we give out.

Okay.

Thanks.

And our next question is from the line of Jay Vleeschhouwer from Merrill Lynch.

Please go ahead.

Thanks.

Aart, the first question concerns Japan.

You highlighted that as being an area of strength in the quarter and it has been quite a while since you did so.

Can you talk about your thoughts on Japan for the remainder of the year?

Do you expect a disproportionate concentration of bookings and momentum to occur in that region over the course of the year and perhaps into next and if so, why?

Jay, I may be wrong but I thought that we actually have already communicated in the last couple quarters that Japan was reasonably strong.

And, we have clearly seen the Japan picked up as they came out of what literally was almost a decade-long economic slump and in the last few years Japan has been doing quite well, I think partially driven by consumer electronic products doing quite well.

That has had positive impact on Synopsys.

In addition, a few years ago we had a number of fairly large renewals that you would say are up and do.

We did say these things are more spread out than they used to be largely because new technology opens the door to renegotiate things going forward and we are sort of trying to keep things engaged on a rolling three years, so to speak.

Having said that, Japan has been strong for us for the last few quarters, was strong this quarter and looking forward, we expect it to do well again.

All in all, I think it is an area of good news for us.

The next 12 month revenue run-off of 890 grew sequentially by about 20 million, somewhat smaller than the sequential increase in the immediately preceding quarters.

Was that just a function of Q1 being a normally or seasonably lower period for bookings than Q4 certainly, or do you expect this level of sequential increase to be more the norm now for the next 12 month runoff?

Well, this actually ties a little bit to the previous question from Raj, which is one of the other observation points you have is the amount of revenue that we have rolling off in fourth quarter, and so obviously how that grows is very much a function of a given quarter but is also a function of the type of deals and the type of transactions.

So, I don't think you can, linearly completely predict that N percent growth means N percent growth for the Company.

Over time thought, it's a good indicator.

Lastly, you're absolutely correct that Q1 is always at the opposite side of the spectrum from Q4 and therefore should not be necessarily the quarter to look at growing massively backlog or even the revenue roll off for the next four quarters.

In terms of the opportunity for IP Compiler; this is something of a follow-on to an earlier question.

How do you think about or what can you say about the size of your implementation or P&R base today as it might have compared to let's say three years ago at the height of the PC Astro cycle for, not mistaken, the license base at that time, was roughly let's say 4,000 licenses, in terms of the base, would you say that your implementation maintenance came----license base or install base is now the same or larger than it was three years ago?

Well, in general, we don't disclose exact date on any of our products but from the utilization point of view it is clearly up.

And so, our place and our position has significantly strengthened over the years so from that perspective I think IC Compiler has a great base to grow into.

Finally, your largest competitor has been speaking quite a bit over the number of quarters about kits and segmented pricing, I'm sure you are quite familiar with what they have been saying.

How interested would you be in one or both of those philosophically or technically or financially, how feasible would that be or interesting to you would any of that be?

Well, we're very positive about any mechanism that improves the business picture for the EDA companies.

From a kits perspective, we've always felt that there were two angles that we are well on top of.

One is kits as mechanisms to say for a given product line, you have different price points for different levels of sophistication and this is something that we have had for many years.

I am not quite sure if it was in 1989, or 1990 that we already had that for the first products and we carried that through still today.

The second thing is looking at kits as a way to solve a specific set of problems and the approach that we take to that is much more to identify what are the specific issues that somebody is worried about and how do you address those?

Let me take an example.

For example, low power is absolutely a segments that---that touches many traditional segments but is very pointed and the only way you can deal with that is by having solutions that go across many of the tools and products and then you can go to somebody who has these problems and you say, well, who are you?

And you will find out that all of the guys that do portable design have that problem.

The same is true for signal integrity.

And so we approach the whole kits or segmentation question very much from what are the biggest pain points and how can we solve them systemically rather than just with some point solutions.

We shouldn't see it, in your case, in terms of any specific modules or packaged approaches, you would, as you say, approach it more systemically?

Well, yes, and where the package that we have is the systemic solution, with other words, would you like to have a 65 nanometer low power flow absolutely come to Synopsys, if you want to call that a kit, that's fine with me, but fundamentally it is the solution that addresses some very sharp challenges.

And our next question is from Rohit Pandey from HSBC Securities.

Please go ahead.

Thank you.

Aart, do you have an idea as to what the hiding activity is for your customers; are many more designers being hired or is it about the same?

It feels like there is a little bit more movement, meaning that ----some of the people that used to work in one place are moving at another place, meaning they tend to be a little bit upward mobile.

I think that that movement is primarily for the people that are very well schooled and technically capable and at the same time, I think there's clearly growth in areas that are low cost.

And so you see increasingly more companies invest in the Far East of course, and even some in Eastern Europe because it is a way to keep expanding without necessarily expanding your overall expense base too much.

Should it lead to more seats with industry or should it be about the same?

Oh, I think there's no question that ere is a growth in seats but also for a very different reason which is increasingly with compute farms, people are using many more copies for the same task or trying to either [paralyze] the task or do better.

A prime example for that is clearly in verification where the complexity is growing so fast that unless you use much more computer [inaudible] programs, you just can't get there.

This is true in functional verification and it's also true in DFM verification.

Even outside the complexity do you think overall [inaudible] activity will take the seats up?

I think it will take up the seats somewhat.

Many of those seats are in lower-cost regions, so it may overall be somewhat of a wash.

It feels more positive, I would say, than it felt in the last two or three years.

Perhaps for Brain, why is the service and maintenance revenue down?

Because you are counting more of a maintenance in the ratable or?

That is exactly right.

As you seem more of the time base license arrangements, those include the maintenance agreements in there.

More of that takes a majority of the licensing activity, it includes maintenance.

The Services, how was it concerning the revenue on a revenue basis?

It was okay.

It was---saw a little bit of growth but we're still working on that as a nice growth segment for the year.

The high utilization you have in services should create an upside later in the year?

We are working to fill that.

And there's a lot of demand for the service is going up and we have embedded that in our forecast for the rest of the year.

On the duration of bookings, it went down to 2.7 and then it has been pretty ----I mean it's the lowest number I have seen in the last few quarters.

Why was that?

Well---it's, again, our contracts typically average about three years, and that's still the number.

You might see some fluctuation from quarter to quarter but that is still in the range.

We're not too concerned.

You spoke about the employee cost and do I get my numbers right, employee cost is $194,000 per person?

Where do you think you can take this number?

That is something I am digging into.

We're focused on reducing that cost in 2006, and I am digging into the details of continuing to work that in line with the nice significant improvements in margin that we built into the plan.

So, that's already built into the plan?

You don't think you could do more than what is already guided out there?

Well, I'm just digging in now.

It has been five weeks.

So, really digging into the expense base and contrasting, look at the industry benchmarks, looking at what we can do to improve process management flows, applications and these type of things that can get our costs lowered.

That is a prime responsibility for me and the team.

Any update on tax litigation?

There is really no update to report.

Our position is unchanged, in that the assertions that we received aren't supported by the applicable tax law.

There's been no developments in the quarter.

As you know, these things move pretty slowly, probably won't see much movement throughout 2006 on it.

We have officially protested the position with the IRS.

And, it takes several years to resolve.

For the first quarter, was the book to book below [one]?

Yes.

We didn't comment on that.

We'll, again, let you see the full backlog at the end of the quar---at the end of the year.

And, we will be able to work through the details at that point.

The simple math, I believe your revenues---revenues from the backlog [inaudible] the backlog was discharged to revenue next four quarters increased $20 million and the average life was 2.7 [inaudible] Is that right, or I'm pretty much off the mark?

Let me jump in, Rohit.

We're not commenting on orders.

Good try.

Thank you.

I guess I'll leave it there.

Thank you, and ladies and gentlemen, we have come to the end of today's conference call.

We do apologize if we were not able to get to your question today.

And now, I would like to turn it back the host for any closing comments.

Well, thank you for joining us.

We had a very solid quarter, and if there are any more questions Brian and myself will be available afterwards.

We hope that you have a good day.

Bye, bye.

Thank you.

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