新思科技 (SNPS) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Incorporated's earnings conference call for first quarter of fiscal year 2008.

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

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

(OPERATOR INSTRUCTIONS) Today's call will last one hour.

Five minutes prior to the end of the call, I will announce the time remaining on 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 Brian Beattie, Chief Financial Officer.

During the course of this conference call, Synopsys may discuss forecasts, targets, and other forward-looking statements regarding the Company and it's financial results.

While these statements represent our best current judgment about future results and performance as of today, the Company's actual results and performance are 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 may affect our future results are described in our Annual Report on Form 10-K for fiscal 2007, and in our earnings release for the first quarter issued earlier today.

In addition, all financial information to be discussed on this conference call, as well as the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures, can be found in our first quarter earnings release and financial supplement.

All of these items are currently available on our website at www.synopsys.com.

With that, I will turn the call over to Aart De Geus.

Good afternoon.

I am pleased to report another good quarter for Synopsys.

We met our targets and are confirming yearly guidance.

In Q1 we delivered solid on-track performance to our continued '08 objective of 7.5 to 8.5 top line growth, 300 basis points of ops margin improvement, rollout of substantial new and enhanced technology, and deepening customer relationships through cooperation on vital productivity improvements.

Specifically this quarter we achieved non-GAAP earnings per share of $0.44, more than 40% year-over-year growth.

Revenue came in at $315 million, at the high end of our target range.

With more than 90% time based license revenue, we stuck firmly to our uniquely predictable business model.

Our disciplined ops margins improvement quest progressed well, with Q1 coming in at 25.6%, this puts us solidly on-track towards our annual goal of 23%.

Finally we shipped major new product releases in December, with a large number of key enhancements and new capabilities.

Overall, we exited the first quarter with our year solidly on-track, in terms of revenue, earnings, cash flow, ops margin, and technology.

Before moving to some product highlights, let me characterize the customer environment.

And that is, we see little behavioral change.

Although the uncertainty in the macro environment may have intensified, it isn't new.

And while there are shifts in internal investment decisions, they haven't changed the R&D side of the semiconductor market.

For the last few years, volume growth and cost sensitivity has been the driving forces for most of our customers.

Against the back drop of continued technology complexity, they focus on two things.

Differentiation for their end markets and productivity improvements for everything else.

Synopsys is very well-positioned for exactly this situation.

For a number of years we have followed a systematic strategy.

First, continue to deliver Best-in-Class tools across the vast majority of our portfolio, and lead in the adoption of new technology nodes.

Second, build a comprehensive portfolio of core EDA tools.

This year we will be completed that goal with the addition of analog implementation capabilities.

Third, assemble and link these tools into coherent design verification platforms, aimed at end-to-end design productivity and predictability.

Fourth build technical and collaboration links to manufacturing that will assure performance, power, and yield.

Fifth, build a bridge to the growing space of software and system design, via high quality IP block and virtual prototyping capabilities.

And finally grow sophisticated global support and service structure, to engage customers of their most challenging design.

As a number of semiconductor companies now shift some of the internal investments, from manufacturing to design, we expect R&D spending for our solutions to stay healthy.

We also anticipate that customers will continue to streamline the number of vendors they have, and consider higher level relationships with select companies, such as Synopsys.

As a result, we project that EDA will grow, and we will gain market share in 2008, all under our very stable business model.

With that back drop, let me provide some product and technology highlights for the quarter.

In core EDA, we made excellent progress, both in adoption and use of our software.

We also shipped significant enhancements and additions to our Galaxy design, and Discovery verification platforms.

For example, Matsushita, the global consumer electronics company behind the Panasonic brand, used our Galaxy flow, including IC Compiler, to design the world's first 45-nanometer consumer chip in production.

Matsushita achieved a smaller dye size, and just as important, lower power consumption using Galaxy.

TSMC has notified us that IC Compiler is the first place-and-route system, to be fully qualified for TSMC's 45-nanometer process.

During the quarter we, also delivered to customers a major Galaxy platform upgrade, which includes expanded capabilities in Design Compiler, fully-integrated hierarchical planning, faster performance in IC Compiler, and a significant upgrade of PrimeTime yielding 2X faster power performance, and lowering memory consumption.

Still to come in 2008 will be several other notable advances throughout our portfolio, focused mainly on speed and productivity.

These include advances that take our high-end low power solutions to the broader market.

Specifically in digital design in 2008, we will introduce advances such as two to three times faster performance, and brand new unmatched DFM capabilities for 65-nanometer and below.

In digital verification, we are continuing to grow off an outstanding 2007, where we greatly expanded our position in this segment of the market.

The integration of ArchPro has increased our differentiation, in terms of low power solutions, and we plan to introduce additional related capabilities during the year, specifically aimed at the mainstream market.

In analog-mixed signal verification, our new XA technology, which combines the accuracy of Spice with the speed of FastSPICE, is demonstrating very good customer success in it's early availability.

For example, iC-Haus, which manufactures chips for industrial, automotive, and medical applications, switched to XA after being able to reduce their simulation time, from six hours to just minutes, while experiencing superior accuracy.

New product advances to be introduced during the rest of the year will include a broad set of parallel processing capabilities.

As mentioned earlier, this year we will introduce a Synopsys analog implementation solution.

Although we have not yet formally announced the product, I can report that in Q1 we moved from alpha to beta test, and that the stability of the product has positively surprised our beta partners.

This capability will not only increase Synopsys pan, but it also removes competitive challenge, as we complete our core EDA portfolio.

Let me move on to design for manufacturing, an emerging market segment still in its early stages.

As you heard from my earlier comments, we consider our links into manufacturing unique, and essential in helping customers achieve their yield goals.

Our strategy is to take full advantage of both the growth potential of this segment, and the differentiation it confers to our core EDA offering.

In Q1 we delivered the first phase of a new integrated map synthesis and map data prep solution, which dramatically reduces lithography turnaround time.

Developed in collaboration with TSMC, this so-called CCX capability has already been successfully tested at TSMC.

Looking forward, we are also working on a new tapeout flow, that significantly speeds turnaround time for fabs, by integrating lithography, TCAD, and yield management.

Looking up to the system side of the design spectrum, we have made excellent progress there as well.

Increasingly, customers are realizing the economic benefits of commercial IP reuse, versus building all blocks themselves.

Excluding memory companies, 17 of our Top 20 customers now buy our [ID].

This quarter we entered the most advanced end of the IT market, with our first 45-nanometer analog-mixed signal customer.

In addition, our newly-acquired DDR products are doing very well.

In this fast-growing standards, we have already seen excellent customer interest and purchases.

Our pipeline through the year features new in-house developed products, for virtually all titles, from USB, PCI Express, SATA, and DDR.

Our other thrust in the systems area, virtual platforms is also doing well.

Virtual platforms create models of hardware long before the chip is actually available, thus enabling software developments up to six months earlier than with traditional methods.

This quarter for example, a key phone architecture firm purchased our virtual platform solution to accelerate their software development.

Closing off on the products, Q1 saw excellent progress in delivering new performance and capability to our users, and we are excited about our robust technology pipeline in 2008.

To conclude, Q1 was a very good start to 2008, and we are confident in our ability to deliver strong results throughout the year.

We will remain committed to growing our profitability, while adhering to our predictable business model.

We have a comprehensive technology platform with a strong product pipeline, and we are benefiting from an expanding set of collaborative and committed customer relationships.

With that, I will turn the call over to Brian Beattie, our CFO.

Thank you Aart, and good afternoon everyone.

In my comments today, I will summarize our financial results for the quarter, and provide you with our guidance.

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

We have provided a reconciliation of our GAAP to non-GAAP results in the press release and the financial supplement posted on our website.

In my discussions all of my comparisons will be year-over-year unless I specify otherwise.

Let me also remind you that last years Q1 comparable results include an extra fiscal week of revenues and expenses, an event that occurs every seven years.

Synopsys reported another very good quarter demonstrating the strength and predictability of our time-based business model.

Q1 financial results were highlighted by solid revenue growth across all products and geographies, resulting in substantial operating margin and earnings expansion.

Additionally we repurchased approximately $83 million worth of Synopsys shares during the quarter.

Now once again, we showed robust increases across our key revenue and profitability metrics.

Total revenue increased 5% to $315.5 million, at the high end of our target range, driven by our continued execution against our strategy.

Normalizing for the extra week in 2007, revenue grew by 13%.

One customer accounted for slightly more than 10% of our Q1 revenue.

Turning to expenses, we continue to execute very well.

Total non-GAAP expenses decreased 5% to $235 million, primarily due to the extra fiscal week in the year-ago quarter that I mentioned earlier.

Expenses also came in slightly below our planned target range, driven primarily by some seasonal shifting out of hiring and other employee expenses.

For the balance of the year, we expect to return to a more typical expense profile with Q2 and Q3 progressing towards a traditionally higher Q4, and we continue to target expense growth at about half of revenue growth for all of 2008.

The net effect of our solid top line growth and excellent delivery in expense management was a 25.6% non-GAAP operating margin.

A year-over-year increase of nearly 800 basis points.

So we are off to a tremendous start towards achieving our operating margin target of 23% for all of fiscal 2008, and we are committed to driving to the mid to high 20s over the next several years.

We plan to get there by making the appropriate level of investment back into the business, to maintain our technology leadership, and to drive sustainable long-term growth while at the same time controlling expenses.

Turning now to earnings.

GAAP earnings per share were $0.31, with cost and expenses totaling $262 million.

This included $11.6 million of amortization of intangible assets, and $15.6 million of share-based compensation.

Non-GAAP earnings per share increased more than 40% to $0.44 in the quarter.

Our non-GAAP tax rate was approximately 25%, below our guidance primarily due to certain one-time tax benefits.

For the entire year, we now expect the tax rate between 26 and 27%, which does not assume renewal of the R&D tax credit in the United States.

Given our very predictable business model, revenue visibility remains strong.

Up-front revenue was 4% of total revenue, well within our target range of less than 10%.

And as expected, greater than 90% of Q1 revenue came from beginning of quarter backlog.

We are strong believers that our highly ratable business model is the right financial architecture for Synopsys and our customers.

We put ourselves in the unique position of not only looking at 2008, but also into 2009 and 2010 with confidence.

This allows us to make a very proactive judgment, as to where we want to invest and how we want to run our business.

And this is a great place to be in any environment.

The average length of our renewable customer license commitments for the quarter was again approximately 3 years.

Now turning to our cash and balance sheet items, cash and short-term investments increased $181 million year-over-year to $860 million, and as expected, there was an operating cash outflow of $51 million in the quarter.

Operating cash was affected by a recent agreement with an existing large customer, that resulted in a shift of their annual payment from the first to the third quarter, along with the timing of our seasonal incentive compensation cycles.

We are confident that we will achieve our fiscal 2008 operating cash flow target of greater than $325 million.

Capital Expenditures were $10 million in the quarter, and we expect to reduce annual CapEx by about 10% over last year.

We returned to our more aggressive pattern of buybacks this quarter.

We purchased 3.4 million shares of Synopsys stock for $83 million, and we have 347 million remaining on our current authorization.

Q1 net Accounts Receivable totaled $142 million, and we maintained industry-leading DSOs of 41 days, reflecting the high quality AR portfolio, and the timing of invoices.

As you know, we do not factor our receivables.

Deferred revenue at the end of the quarter was $609 million.

We ended Q1 with approximately 5,200 employees, basically flat to our fourth quarter head count.

And now addressing our guidance.

For the second quarter of FY '08, our targets are, revenue between 317 and $325 million.

Total GAAP costs and expenses between 269 and $283 million, which includes approximately $17 million of share-based compensation expense.

Total non-GAAP cost and expenses between 242 and $252 million.

Other income and expense between 0 and $4 million.

A non-GAAP tax rate between 26 and 27%.

Outstanding shares between 145 and 150 million.

GAAP earnings of $0.22 to $0.26 per share, and non-GAAP earnings of $0.37 to $0.39 per share.

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

Now our fiscal 2008 outlook.

We reiterate that we expect revenue between 1.3 and $1.315 billion.

A growth rate of approximately 7.5 to 8.5%.

We plan to limit total non-GAAP expense growth to about half of revenue growth.

A non-GAAP tax rate between 26 and 27%.

Outstanding shares between 145 and 150 million.

GAAP earnings per share between $1.03 and $1.12, which includes the impact of approximately $66 million in share-based compensation expense, and non-GAAP earnings per share of $1.56 to $1.61.

We have increased the low end of our guidance range by $0.02, and the top end by $0.01, as a benefit from a lower tax rate is offset by slightly lower Other income and expense items, due to interest rate declines.

Cash flow from operations are greater than $325 million.

As a mentioned earlier, we are targeting 23% non-GAAP operating margin for the full year.

In summary, we are very pleased with our Q1 financial performance.

We continue to execute against our strategy, while delivering strong growth and profitability.

We hope to continue that momentum throughout 2008.

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

Ladies and gentlemen, (OPERATOR INSTRUCTIONS)

And our first question comes from the line of Harlan Sur, Morgan Stanley.

Please go ahead.

Thank you.

Good afternoon.

Nice execution on the quarter.

Aart I think your probably expected this question.

But one of your major competitors did cite weakness at the very end of their December quarter, so I guess the question to you is, did the team at Synopsys see any significant changes in terms of deal closure rates, or aggressive pricing negotiations at the end of your January quarter, relative to prior quarters?

Has the customer pipeline in the first half of this year changed relative to your view of it, let's say three months or even six months ago?

The answer is no, and no.

And obviously we made sure that we checked with our sales force to see if there was any change in both the pipeline or how we execute it, and the answer was no in both cases.

Now we read the newspapers as well, and we can see that everybody is reading a lot of newspapers, but as far as it pertains to our domain, I don't expect actually very big changes, because a number of our customers are really shifting their investments from manufacturing into design.

They have to differentiate in design, EDA is absolutely central to that.

And if you have strong technology that can help them with that, I think you are in a good position, and we are that.

Well, so to follow up on that, there's been a lot of reference recently to semiconductor R&D spending trends in '08.

Not by you but by others, and I think it is getting difficulty to use R&D as a proxy for EDA tool spend, given the moves by the IDMs to a more fab-like business model, but what I think what everyone is trying to get at, is what is the level of design activity and product development by your customers, and is that slowing relative to what you saw in 2007, or is that actually accelerating here in '08?

Well first I agree with your observation, there are so many moving parts right now, that a number of people have a tough time figuring out where this all leads.

Let me start first with the designs.

We do not see any major change in design starts period.

We have said all along that we see two phenomena.

One is that the number of silicone nodes that stay alive has been growing, meaning that some of the older nodes are being pushed harder for performance, in order to take advantage of the cost.

On the other side of the spectrum, the most advanced nodes continue to be designed in at a feverish pace, and we are now seeing the move to 45 and even 32 being very, very active, with the most advanced designers.

So from that perspective, I think that the spending with the tools will continue.

Great.

And one last question for me.

Just a longer term question.

So you talked a lot about your penetration and your competitiveness on litho-related tools and mass data prep, and as we think of the 32-nanometer node, and the move to double-patterning by your customers, do you think that is going to drive faster growth for your litho solutions?

I would say yes and no.

Yes definitely in the sense that the complexity of what needs to be done there, just demands more compute power and more capability.

I am a little careful with just jumping to the conclusion that every node drives more volume, partially because those people live with budgets too, and they do not change all that rapidly.

But in general the most advanced technologies are to our advantage, because that is sort of where we are as a company live.

One last question for Brian.

I notice you are not giving the same level of transparency on the product revenue segmentation, you're no longer breaking out the implementation and verification segments.

Any reason for that?

Well I think we were telegraphing our metrics that we are going to continue to disclose to everybody.

And we saw a trend over the last few years of just more and more sales at the pool of core EDA tools, so there will be a budget set aside, there would be performance expectations, and achieving that through both our verification and our up-front tools, and that are the focus, so it's really selling as a pool, and therefore we put them there, and that is how we are representing it.

Okay.

Thank you.

They both did really well in the quarter though as a composite of the business too.

Okay.

Great.

Thank you very much.

And our next question comes from the line of Raj Seth, Cowen and Company.

Please go ahead.

Just to follow-up a little bit, Aart, on the previous question, if hypothetically if what I heard was targets haven't changed, you haven't seen any big shift in pricing, et cetera, but if hypothetically bookings started to weaken, how do you think about managing the business?

I think you once told me you had a hard line around operating margin targets, and everything else was a variable.

Are you still thinking about the business that way?

In you saw in subsequent quarters weaknesses in bookings, which would not appear in revenues for a while, would you begin to take early action to preserve margins in expenses?

How do you think about that?

Sure.

Well let many first remove the anxiety around the if.

We do not see bookings weaken, and as a matter of fact I think I would be reluctant to communicate to you that we had a strong quarter, if under the covers we felt very differently.

Having said that, if we did see any change, I think that we would pay a great deal attention to the bottom line.

But you know, we are doing that no matter what.

And so that becomes only part of how we manage the company, and maybe the best way to put that in numbers is to say, hey, we don't want to grow the expenses at more than about half of the revenue.

And so if revenue over time were to become weaker, we would definitely pay even more attention to the expenses.

Right.

Thank you.

That is helpful.

And just a quick one for Brian.

Any update on the tax settlement you talked about last quarter, sort of what the amount is, et cetera?

Yes.

Yes and no.

The progress we have made is that the tentative settlement with the IRS has moved to a Joint Committee of U.S.

Congress as we anticipated.

And relative to the timing of getting that final sign-off, it typically takes several months to get approved, and so we have been informed it's been sent in, and it will still be a couple of months, two to three months probably to get it resolved.

Thanks.

That is all I have.

Nice quarter.

Thank you.

And next we have the line of Jay Vleeschouwer with Merrill Lynch.

Thanks, good afternoon.

Aart, I would like to ask the question on the addressable market remaining for digital in particular.

Do you have any way of gauging how much, or how many of the design infrastructure, and upgrade decisions, have been made specifically for 65 and 45?

How would you characterize it, in terms of remaining available runway for those kinds of decisions and commitments for designing to those nodes?

And then secondly, for either you or for Brian, in terms of resource commitments and spending, could you go into a little bit more detail on how you are apportioning R&D, specifically, how much remaining ongoing spending is being done to complete legacy tool development, even any remaining development pertaining to incorporating the Avanti technology, I know that is quite a while back but if there is any work still going on there, and how much would be an apportion to wholly new efforts?

Let's talk with the changes to 65 and 45.

We have reported to you over time, sort of the evolution of 90, 65, 45, now 32, and when we talk about those people, invariably it is probably at a set of about Top 20 customers that make up the bulk of that.

Because those are the people that move way ahead of the pack.

And as a matter of fact, as mentioned earlier, the pack is sort of spreading out.

So at times, given that we live so much in the advanced technology, I am surprised myself when I talk to a customer who is agonizing about the move from 130 to 90, and thinking, how can we help these people, because that is by now old technology from our perspective, but it is still very new for them.

And so I think there is a fairly big mainstream group of people that still needs to move, and will be moving over the coming couple of years, because certainly 65-nanometer is very stable now, and has a lot of benefits for people that want to add more functionality on their chips.

Regarding the R&D expense allocation, the majority of our products are evolving continually.

Is there anything left in terms of integration of Avanti and Synopsys, interesting you ask the question, because just a few days ago, I mentioned, I don't recall now who was from Avanti and who was from Synopsys.

So in that sense I think that integration is entirely complete.

But many of the products that we have are now intersection products, and that is where most of the investment goes, and the rest is just some remedial fixing.

Backlog and deferred revenue question, Brian, can you elaborate on the sequentially decline of deferred from Q4, which was substantially larger than we saw in the Q4 to Q1 in the preceding few years.

Was that tied into the cash payment you mentioned earlier, that you took in third quarter from Intel in lieu of the current quarter, or was there something else going on in terms of replenishing deferred in the third quarter?

You basically got it.

We would not mention customers by name, but yes, there was a large contract signed in Q3 of last year where deferred revenues increased, and then they would decline sequentially until the third quarter of 2008, when it would then increase again with the invoicing.

We take that into the receivables, and then work that down throughout the year, based on the annual payments.

So you got it exactly right.

And then finally, do you think you can rebuild backlog, or grow backlog for the year as a whole?

In other words, will you have a positive book to bill for the year as a whole?

As you well know, we do not disclose book to bill, we do not disclose our backlog until the end of the year, and so we have not changed that.

But all-in-all, we are well on-track on the business that we were thinking to do.

And just to clarify, when we look at how we structure our business right now, we put equal weight on the present year revenue, as well as on the growth of backlog for the subsequent year, and even two years further down, all the way to compensation of top people being linked to that.

And that is largely in order to make sure that we stay on a good growth trajectory, while managing the business in a fashion that has stability, and a high degree of transparency.

Thanks Aart.

You are welcome.

And our next question comes from the line of Matt Petkum with D.A.

Davidson and Company.

Please go ahead.

Good afternoon.

Aart, I was wondering, given the changing landscape and the fact that it appears you guys have the upper hand from an equity valuation standpoint, as well as a balance sheet standpoint, relative to your peers, would it be reasonable to expect increased M&A activity for you guys this year?

Well, you know, as you probably well know, we never comment on M&A.

We have done M&A in the past, and when the opportunity is right of course we are always open.

At this point in time, I think that the characterization of 2008 is going to be very much a year where strong technology and good execution makes all of the difference, because as much as I do not see the financial behavior of our customers change, the whole world right now is somewhat nervous about the economic status.

Therefore buyers become more discerning, and what that means is that they make sure that the companies they spend their money with will be around for a long time, and will be solid, and will give them actually the differentiation they need in these times.

And so from that perspective, I think our #1 focus has to be absolutely on stellar execution, and I guess so far so good.

Okay.

And then you mentioned the integrated litho-product that you were talking about that would include TCAD management amongst other things.

Would that be a post-DRC product, or would you integrate that with what you are doing in DRC as well?

It is definitely post-DRC.

Although it is very clear that increasingly all of these things are becoming gradually more integrated, and you may recall from my preamble, that I set sort of a precedent that first you need to have good tools, then they need to talk well together, and then it becomes more of an integrated platform.

Well all of these things are ultimately aimed at the same thing.

Which on the one hand, how do you maximize performance and minimize power, in other words, the attributes to the differentiated chip, and on the other hand, how do you get the best productibility and predictability out of the whole flow, and that greatly impacts the economics, and we are seeing that by integrating well a number of the back-end steps, we can have major impact on the turnaround time in the fabs, and that of course has a very positive impact on their customers.

Okay.

And then just finally, will future analog revenues, obviously they will be small to begin with, but will that be encapsulated in your core EDA revenue bucket, or will you make us a new bucket for that one?

No you are right that will be in the core EDA.

And we have said all along that we consider it both an opportunity to grow in a subsegment that we were not in before.

But just as importantly, it resolves what I consider a critical strategic hole that we have had for a long, long time, that allows us now to be much more competitive in our market overall.

And simultaneously go to customers and provide them a truly full solution.

Okay.

Thanks for taking my questions.

You are welcome, Matt.

Thank you.

And our next question comes from the line of Rich Valera with Needham & Company.

Please go ahead.

Thank you.

Good evening.

Aart, last week at the EDC CEO forum, I think a projection was put forth for EDA growth in 2008 of 2%, and I know you didn't create that forecast, but I am just wondering where you stand relative to that forecast, if you're sort of willing to comment on how you see EDA growth this year?

Well, you are correct.

I did not want to come forth with a prediction for EDA, because we have obviously seen that the impact of revenue models has a great impact of how you make these forecasts.

And we can stand behind a very solid and visible forecast of 7.5 to 8.5% of this year for us, because we actually mostly know what it is going to be, and that is a very different situation than if you are a company that is much more dependent of the ups and downs of having up-front, or if you have a very different revenue recognition model.

And so having been there many years ago, I know how difficult it is to predict your future, and therefore we are caution for predicting EDA.

Overall I think it's a healthy market, and it will continue to grow somewhat at least.

I guess I was thinking of it more in terms of bookings growth, rather than understanding some revenue model changes will clearly put pressure on the industry revenue, but do you see the industry growing on sort of a bookings basis, or however you would want to look at it, sort of factoring out the obvious revenue compression from that model shift?

Well, if I may send the note of caution how people overinterpret bookings, you obviously can greatly mislead yourself and others depending on the length of the deals you make, and think of it as bookings growth when in reality it is essentially taking out years, so we have been very careful with that as well, having learned from the past.

And so bookings growth is actually a very tricky indicator.

I understand that there is some value to that.

Our own sense is that we continually watch the run rate growth with our customers, and that is internally absolutely the single thing that we pay most attention to, because that is a pretty decent predictor of future revenue growth.

If I could just follow-up on that one last point.

So would you feel comfortable, it sounds like you are planning certainly to be building your run rate throughout this year, and as you enter into fiscal '09, that you will have a higher run rate in fiscal '09?

Is that a fair statement?

That is a very fair statement.

That is absolutely what we are not only planning, but managing the Company towards.

And Brian.

I missed the actual number of shares you bought back this quarter?

Yes.

We bought back 3.4 million shares for $83 million in the first quarter alone.

Great.

That is very helpful.

Thank you.

And our next question comes from the line of Sterling Auty with JPMorgan.

Please go ahead.

Thanks.

Can I actually get clarification on the last comment, Aart?

You said that your managing the business via at a higher run rate next year meaning you expect faster revenue growth next year?

I didn't understand the comment.

Okay.

Let me clarify without going into '09 guidance, which we do at the end of the year.

What I meant to say, if it wasn't clear, is that we are running our business with two fundamental objectives.

The first one that you all know well about, is to keep improving gradually the ops margin, and we do that by roughly speaking, making sure that expenses are at about half or less of the revenue growth.

The second one is, I meant to say that we expect that revenue in '09 will be larger than in '08, and in '08 we did give guidance of revenue growth of 7.5 to 8.5%, but given that much of our focus in the bookings and the run rate with the customer, is aimed at building backlog for '09 and '10, that is why I am saying that is our objective, and our plan is entirely aimed at growing the revenue of the Company.

Okay.

Great.

Thanks.

And then in terms of you made the comment that in this type of year, it is execution and better technology that is going to win the day.

You have mentioned a large number of different areas in terms of new product introductions, et cetera.

But from your point of view, what are the couple of the real keys that are going to drive the bookings, or the bookings with your customers this year?

Is it going through the inflection on IC Compiler, or what are the two or three key areas that we should really be watching as the year unfolds?

Actually, I think that all the product advances, which we have many, many are very much focused on speed, capacity, et cetera, all have one fundamental objective at this point in time, which is the productivity and the success rate of our customers.

And unfortunately the word productivity is a much more nebulous term, for which there is not a very sharp definition, or easy set of metrics, but it is the set of measures that have the biggest economic impact on our customers, so I expect that a lot of the growth will come from customers that gradually say, hey, I want to go much more with Synopsys, because there is a much better chance of getting my chips out on time, with the performance and the power characteristics I am looking for.

Now on the margin, obviously there are some areas that may grow a little bit faster than others, but from a big picture point of view, that is really how we are managing the company.

And then last question is for Brian.

In terms of the sales and marketing expenses in the quarter, how much of the variation versus last quarter should we think about, in terms of some of the variable expenses, like commissions related to bookings in the quarter, and how much of it is other factors, including seasonality?

Yes, I am just comparing here in terms of the expenses Q4 to Q1 of '08 came down about $7 million.

To primarily that is related to shifting out of some of our expenses, in terms of bringing on new head count.

That did not happen in the quarter.

We also were tight on some travel expenses for the quarter.

Some of the contractor usage.

All of that was light, and as a result, we were able to come in less than our plan, and really drive up that margin number for the for the quarter.

So a lot of that has shifted out relative to any head count growth that we have got factored in from sales and marketing.

And as you know, there is a proportionate allocation of commission expense to the level of activity as it comes in.

So it is all lined up in our guidance of the year for where we expect it to come in.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) We have a question from the line of Tim Fox, Deutsche Bank.

Please go ahead.

Thanks.

Good afternoon.

Aart, just a couple of questions around DFM.

You mentioned the focus there was around growth of the segment, as well as differentiation of your flows utilizing some of the DFM technology.

I was just curious moreso around the growth, and the fact that in many cases you are selling a different value proposition to the fabs, than you may be to the designers themselves, and wondering how do you actually get the value of all of these new TCAD/yield/litho technologies, how do you actually get the value out of the customer, if you are selling to different people, and are you considering any different kind of licensing models to actually extract that value that you are rolling into your flows?

It is a very good question, because there is no question that it's sort of almost like building a bridge from two sides of the river, and in many ways the ultimate value is, how well can you help both sets of customers get the chip through with high yields.

Now do not forget that on the foundry side if you do not have yields, you do not get any money either.

And of course, if you do not do a good job on the design side, you are essentially dead.

So our job is to sort of build that bridge more and more, and initially we definitely sold very independently on both sides of it.

Increasingly now we are going to see that the learnings of the manufacturing side get translated directly into our tools, and some of those can be reasonably upstream, such as directly into the place-and-route.

In order to minimize some of the yield issues, or make it more manufacturable, and my suspicion is, that as a number of customers become less and less involved themselves in manufacturing, that they will almost use us as a substitute to help them guarantee the quality of that bridge.

And so I view it as much as an area of opportunity to grow, as well as an investment area that solidifies the entire rest of our offering.

Okay.

That is helpful.

On the other end of the design spectrum, and around systems, you mentioned virtual platforms starting to add a little bit more meaningfully to the business.

Just wondering if you could characterize, who is buying the virtual platforms, is that a market that you see as reasonable-sized growth over time, or is this more nichey, that will fill some gap in the system level design area?

I think the jury is out, but the promise is interesting.

And just to clarify for those that may not be familiar what this is, what virtual prototyping is, is a capability to build a model of a chip or electronic system before that system or chip is available.

And using that model, you can now start developing and checking out the software that is going to run on them.

Well as you can imagine, with many, many products, the software content is becoming very, very large, as a matter of fact becoming increasingly one of the key bottlenecks, and so if you can start earlier with that, you have a big benefit.

So why is that not a slam dunk?

Well it is not a slam dunk because you actually need to develop the models, that is something that requires some skill, and you need to have a strategy whereby your chips will be used in multiple situations, so that the molds are reusable.

And we are starting to see now both on the people providing the chips, as well as interestingly enough, new buyers come in from the system side, those that are going to use the chips, and I expect that the virtual prototyping or variations on it, increasingly are going to be almost the hand-off, or the spec between those two parties.

And so from that perspective, the last few quarters have been actually pretty positive.

Very good.

Thank you.

You are welcome.

And you have a follow-up question from the line of Sterling Auty with JPMorgan.

Please go ahead, sir.

Yes.

Thanks.

Brian going back to the third quarter last year, you were still kind of giving us the amount of, beginning of the quarter backlog that would flow into revenue over the next four quarters.

Is that still a metric that you can give us?

We are giving a lot of visibility through our, knowing that we entered the year with more than 80% of 2008 revenues in hand, with entering each quarter with more than 90% of the quarter booked, and again we reconfirm that top line revenue guidance, so given that one quarter through with very strong performance, you obviously can see that we have got a lot higher visibility going in.

So we are finding that the quarterly variations relative to the bookings as we did see last year, can not be that that significant to the business, they are not really indicative to the level of the activity, just due to the rotating nature and timing of when the contracts get renewed.

So again we continue to focus on the total year deliverables, and continue to provide very good visibility in each quarter, and then as you know, we give the actual backlog number at the end of the quarter, which in turn provides the level of booking activity, and again we will give total year guidance at the end of 2008 relative to 2009.

And I would add as well to the metrics about this ongoing focus on multi-year business deliverables, is that that is built into the compensation levels in the Company.

So it is not just optimizing one year but a multi-year agreement, multi-year commitment with customers, and multi-year return for investors.

One other question.

In terms of Cadence and their EDA card that has been out there for a little bit now.

Are any customers coming to you and asking for different types of structures, or different types of arrangements, that gives them additional flexibility to take down more seats on a temporary basis, to kind of mirror that, and if so, how are you handling it?

Well customers have always asked for more flexibility, and at times, we joke that the word flexibility just means lower pricing.

Now there are many mechanisms for that.

We have quite a number of models that allow people to take up more software under the right circumstances.

Which should not be confused with how one actually recognizes revenue, which is a whole different story.

And there we should be very clear that our model remains one of well over 90% is ratable, and so that is a whole different aspect of how all of these mechanisms work.

Having said that, there is no question that we should work with the customers to optimize the impact of our software on their success, because at the end of the day, those certain customers that are most successful with our software will be returning customers.

All right.

Thank you.

You are welcome.

There are no further questions in queue at this time.

Please go ahead with any closing remarks.

Well at this time, I would like to thank you for the time you spent with us.

I think we had a very good quarter, and we are well launched into the year, and as usual, Brian and I are available after the call.

Have a good afternoon.

And ladies and gentlemen, this conference will be available for replay from 4:00 p.m.

tonight through March the 5th at Midnight.

To access the replay dial 1-800-475-6701, and then you will be prompted for an access code.

The access code is 909867.

For international dialers, please dial 320-365-3844, and enter the same access code, 909867.

Once again the 800 number for the replay is 475-6701.

International number for the replay is 320-365-3844.

And the access code is 909867.

And again that will run from today at 4:00 p.m.

Pacific through Midnight March the 5th.

That does conclude your conference for today.

Thank you for your participation, and thank you for using AT&T Executive Teleconference service.

You may now disconnect.