新思科技 (SNPS) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Synopsys Incorporated's earnings conference call for the second quarter fiscal year 2008.

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

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

(OPERATOR INSTRUCTIONS).

Today's call will is last one hour.

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

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

At this time, I would now 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 make 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 quarterly report on Form 10-Q for the first quarter of fiscal 2008, and in our earnings release for the second 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 second 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 happy to report a very strong quarter for Synopsys.

Revenue came in at $325 million, at the high end of our target range, while maintaining our uniquely predictable business model, with over 90% time-based license revenue.

We have expenses within our guidance range, and delivered above target non-GAAP earnings growth of 17%, or $0.41 per share.

We completed the acquisition of Synplicity, a strong technology leader in FPGA design and hardware-based rapid prototyping.

We further strengthened our product offering, yielding very strong business levels, that support our growth expectations for '08 and '09.

And we are raising revenue and earnings guidance for the rest of this year.

As many of you have asked us why we are seeing a better environment than our competitors, let me address for a moment the customer landscape.

Things have not changed much from last quarter.

The overall economy has been soft, bringing some uncertainty to the semiconductor industry.

On the positive side, even if mitigated a bit by continued ASP pressure, volume demand for electronics continues to grow.

The main profitability stress areas are in the memory markets, where a number of companies battle for share, based on price and capacity.

For the rest of the semiconductor industry, we see a number of M&A transactions aimed at giving companies larger share, and increased competitiveness in market subsegments.

An example of this trend is the recently announced wireless joint venture between ST and NXP.

For Synopsys, there is little change in our customer's behavior, including timing and closure rates of contracts.

And although we have seen some aggressive pricing attempts by competitors trying to make their quarter end numbers, Synopsys has fared well.

In this environment, customers are searching for optimal EDA partners and closer collaboration.

Our leading technology, comprehensive solutions, conservative business model, and strong field support, make us a preferred candidate for broader and closer relationships.

Indeed, just this week we announced that yet another leading semiconductor company, Matsushita, maker of the Panasonic brand, has selected Synopsys to be it's primary EDA supplier.

Their decision is supported by an expanded license and collaboration spanning design, digital and AMF verification, and manufacturing.

This agreement indicates a further step towards delivering better productivity, through more integrated solutions to our top customers.

In summary, companies are understandably cautious in their spending.

However, Synopsys is executing well, and we continue to grow our business run rate.

A key benefit of our ratable business model is it's inherent predictability, which means that we are already well into the planning of 2009 and 2010.

While we will provide '09 guidance after our fourth quarter, I want to respond to your requests with some preliminary thoughts on next year.

Based on our business currently running ahead of plan, the closure of the Synplicity acquisition, what we see as a healthy pipeline of opportunities, and steady organic growth, our objective for '09 is to reach double-digit revenue growth again.

In addition, we plan on continued operating margin expansion, supporting double-digit non-GAAP EPS growth in '09.

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

Across the board, we are doing well and feel momentum in many accounts.

This momentum was visible at our Western U.S.

User Group Meeting in March, with record attendance of over 2,000 engineers.

The program highlighted a complete solution, from system to manufacturing.

As a result, we saw substantial increase in attendees from system companies and foundries.

Sessions on low power were the hottest, no pun intended, and it was standing room only for our IT and manufacturing sessions.

One of the particularly well-received perspectives has been the progress were are making in use of multi-core, multi-thread computation in our products.

These new capabilities result in substantial speed-ups, such as a 2X performance boost and extraction using dual cores.

In analog/mixed-signal verification, we delivered 3X performance improvements through HSPICE on a single CPU, and a further 2X on four cores.

We also pioneered a novel capability for concurrent mass synthesis, and mass data prep, shaving off significant time in this crucial premanufacturing step.

Also in Q2 we launched Eclypse, our low power solution.

Eclypse is a comprehensive suite of system level verification and implementation technology, together with IP, methodologies, and services.

Built around UPS, the industry standard united unified power format, it is designed to make adoption of advanced low power techniques easier for both advanced and broader market customers.

In core EDA, both our digital and analog/mixed-signal systems did very well.

In Synthesis we introduced Design Compiler Graphical, a break-through new extension to Design Compiler, that predicts and reduces downstream congestion in place-and-route.

Customer feedback is excellent.

They are reporting that congestion avoidance significantly improves design to productivity, and schedule predictability.

In physical design we are seeing a number of customers coming to Synopsys after having experienced challenges, with insufficient or immature capabilities from others.

In addition, we will soon introduce a brand-new router developed from the ground up, that supports multi-core computation.

In beta availability today, it significantly improves speed and quality of routing, while tackling very tough manufacturing challenges.

Stay tuned for more details.

We are also seeing good progress on the analog/mixed-signal side.

STMicroelectronics recently adopted our XA capability, which combines HSPICE accuracy with the speed of FastSPICE, for it's advanced Smart Power technology.

Additionally, we announced the results of our collaboration with TSMC around a new modeling methodology for their 40-nanometer process, that improves AMS simulation, while reducing memory use.

Our new custom design solution is on track for introduction later this year.

It is already getting very positive feedback from our initial beta partners, and sneak previews of the technology at our large User Group Meetings in San Jose and Israel generated a great deal of interest.

Now let me turn to our adjacencies, systems and manufacturing, each representing about 10% of our revenue.

Looking at our entire product portfolio, IT was the one area this quarter that saw some short term choppiness.

This correlates with light results reported by other players in the IP space as well.

We remain confident however, in the importance and impact of this area, and are continuing to invest in broadening our offering.

Specifically, we delivered the industry's first certified USB 2.05, or mixed-signal core, for 45-nanometer processes.

The small area and low power consumption make this core ideal for high volume, mobile, and consumer applications.

IP continues to be a hot topic for semiconductor companies.

Many of them are adopting commercially available IP while focusing their own development R&D on truly different shading IP blocks.

HiSilicon, for example, which designs chips for communication networks and digital media, selected Synopsys as it's IP vendor of choice, for protocols including USB, PCI Express, and DDR.

We also completed virtual platform projects aimed at embedded software development, for two major customers in the computing and consumer electronic domains.

In manufacturing, both our mask and TCAP solutions showed very good progress.

In the mask area, Proteus OPC was selected by two important customers.

One, a large consumer electronics company chose us not only for their very advanced 32-nanometer process, but also to replace the incumbent, previous process nodes.

After substantial competitive evaluation, the other, a global leader in storage solution also chose Proteus.

In TCAP, Toshiba adopted [Centaurus] for simulating manufacturing process, such as etching, to optimize complex device structures.

As a result, Toshiba is able to develop technologies faster, reduce costs, and improve yields.

Another interesting note is that for many emerging solar cell start-ups, Synopsys TCAD is a promising optimization solution in the global quest for green power.

Finally, last week we closed our acquisition of Synplicity, which is very positive from at least four angles.

One, we are being joined by a very capable technical team.

Two, Synplicity is a clear leader in the directly adjacent FPGA design area.

Three, Synplicity brings an opportunity to cross-sell products to each other's customer base.

And last but certainly not least, Synplicity's growing rapid prototyping business, will allow us to put increased emphasis on the embedded software market segment.

We plan to rapidly integrate the company around the same operating margin as Synopsys.

Synplicity will contribute positively to our EPS growth next year, while simultaneously becoming central to our strategic systems thrust going forward.

In summary, Synopsys has momentum and expects continued strong financial execution for three key reasons.

Our broad product portfolio and critical mass are enabling customers to focus on fewer more leveraged vendor relationships.

This year, Synopsys will see the continuous roll-out of compelling technology and exciting new products.

And finally our focus on EPS growth through expense management, revenue growth, and a uniquely predictable business model, make Synopsys a long-term, competitive and stable partner.

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

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, including the financial impact of our recent Synplicity acquisition.

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

We have provided reconciliations in the press release and financial supplement posted on our website.

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

Synopsys delivered solid second quarter results, highlighted by very strong business levels, double-digit revenue, and non-GAAP earnings growth, and continued operating margin expansion.

In addition, we repurchased $87 million worth of Synopsys shares, and exited the quarter with more than $800 million in cash, which of course is prior to the Synplicity acquisition that closed just last week.

Now let me provide some additional details on our financials.

Total revenue increased 11%, to $324.6 million, at the high end of our target range, with particular strength in Japan.

From a product perspective, we continue to see broad-based demand for our solutions, our Galaxy design and discovery verification solutions, which make up our core EDA platform, each delivered revenue growth in the double-digit range during the quarter.

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

Turning to expenses, we remain focused on cost and expense management.

Total non-GAAP cost and expenses were $249.7 million, and expected sequential increase due to the timing of quarterly expenses, including variable compensation, and some hiring that shifted out of Q1 into Q2.

For the quarter, non-GAAP operating margin was 23.1%, and we were well on-track to achieving our target operating margin for the year of 23%.

We remain committed to driving to the mid- to high-20s in the coming years, as we continue to focus on profitable revenue growth.

Turning now to earnings, GAAP earnings per share were $0.27, with costs and expenses totaling $275 million.

This included $12.4 million of amortization of intangible assets, and $17.8 million of share-based compensation.

Non-GAAP earnings per share increased 17% to $0.41, exceeding our target range.

We achieved these strong results while continuing to make disciplined investments, that position us very well to capitalize on the long-term opportunities we see for Synopsys.

Our non-GAAP tax rate was approximately 26%, and came in at the low end of our guidance range.

For the entire year we expect the non-GAAP tax rate of approximately 26%, which does not assume renewal of the R&D tax credit in the United States.

Given our predictable business model, revenue visibility remains strong, and we continue to execute well on contract mix.

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

And as expected, greater than 90% of Q2 revenue came from beginning of quarter backlog.

Our ability to consistently deliver solid financial results, illustrates the power of our highly time-based business model.

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

Now turning to our cash and balance sheet items, cash and short term investments increased $50 million year-over-year, to $817 million, which again is prior to the Synplicity acquisition.

We generated $35 million in cash from operations during the quarter.

We expect higher cash generation in the second half of our fiscal year, partially driven by the expected annual payment from a large customer in the third quarter.

We continue to target 2008 operating cash flow of approximately $325 million, with free cash flow generation of $280 million.

I would also like to comment that our cash balance is not exposed to auction rate securities, and we are pleased with the high quality and conservative risk profile of our investment portfolio.

We purchased 3.8 million shares of Synopsys stock for $87 million, and have approximately $260 million remaining on our current authorization.

Diluted shares outstanding for the quarter were $145 million.

Q2 net Accounts Receivable totaled $172 million, and we maintained industry-leading DSOs of 48 days, reflecting the high quality of our AR portfolio and the timing of invoices.

Deferred revenue at the end of the quarter was $587 million, and we ended Q2 with approximately 5,300 employees.

As Aart highlighted, we are excited to have closed the acquisition of Synplicity last week.

It was an all cash deal valued at approximately $181 million, net of cash acquired.

We expect the transaction to be slightly dilutive to our non-GAAP earnings in fiscal 2008, and accretive in fiscal 2009.

Although we are still early in the planning process, I wanted to provide you with some preliminary thoughts underlying our FY '09 goals of reaching double-digit revenue and EPS growth, along with operating margin expansion.

Traditionally, the way we think about our business is to limit expense growth to about half of revenue growth.

Now as you model 2009, at this point we believe that ratio would temporarily be in the 70 to 75% range, due to the near-term revenue transition and integration of Synplicity.

Before I provide our third quarter and fiscal 2008 guidance, let me make some general comments.

Our targets reflect an increase in our base Synopsys revenue and EPS guidance, and also the addition of Synplicity.

We expect Synplicity revenue to be modest in Q3 and slightly higher in Q4, primarily reflecting the purchase accounting haircut that is applied to deferred revenue.

Given the highly complementary nature of the two companies products, our goal over time is to realize revenue synergies, including cross-sell opportunities into the combined installed base.

We also believe there are opportunities for expense synergies over time, such as IP integration and typical G&A efficiencies.

Now please keep in mind that we closed the transaction only a week ago.

So these assumptions may change as we complete the valuation work and the integration efforts.

It is also important to note that to ensure minimum impact on customers, we have kept both their development and sales organizations virtually intact.

Finally even with the slight dilutive effect from the acquisition in 2008, we reiterate our original operating margin target of 23%.

Now moving on to guidance.

For the third quarter of FY '08, our targets are revenue between 335 and $343 million.

Total GAAP costs and expenses between 290 and $308 million, which includes approximately $17 million of share-based compensation expense.

Total non-GAAP costs and expenses between 260 and $270 million.

Other income and expense between 0 and $3 million.

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

Outstanding shares between 143 and 148 million.

GAAP earnings of $0.18 to $0.24 per share, and non-GAAP earnings of $0.38 to $0.40 per share.

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

Now our fiscal 2008 outlook.

We are raising our revenue range with our new target between 1.325 and $1.340 billion.

A growth rate of approximately 9.5 to 10.5%.

At this time, we anticipate that Synplicity will contribute approximately 20 to $23 million in revenue.

A non-GAAP tax rate of approximately 26%, outstanding shares between 146 and 149 million, GAAP earnings per share between $0.99 and $1.11, which includes the impact of approximately $65 million in share-based compensation expense.

Non-GAAP earnings per share of $1.60 to $1.64.

We have increased the low end of our guidance range by $0.04, and the top end by $0.03, even taking into account the $0.02 to $0.03 dilution we expect from Synplicity.

Cash flow from operations of approximately 325 million, and as I mentioned earlier, we are targeting a 23% non-GAAP operating margin for the full year.

As a reminder, our guidance excludes Synplicity's operating revenues and expenses through May 14th, as the acquisition closed on May 15th.

In summary, we once again demonstrated solid financial execution.

We are performing well against our strategy while delivering top and bottom line growth.

Our results illustrate the continued momentum in our business, and our proven ability to execute in a competitive environment.

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

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Raj Seth with Cowen and Company.

Please go ahead.

Hi.

Thanks.

First, just a clarification, Brian.

You said 20 to 23 million from Synplicity.

Is most of that just purchase accounting, I mean they were running, what, I think 17 million a quarter or something, or are you having to change the revenue recognition itself to get to your model?

What is going on there?

You bet.

It is clearly the haircut you get in purchase accounting related to the deferred revenues, and again, as a public company, you can see the amount of deferred revenues they had at the end of their first quarter, and to that it is a very large haircut based on purchase accounting rules, somewhere in the 90% range of that is lost.

So you basically start over again on the revenue basis.

Right.

And what kind of model were they running?

Do you have to shift their model at all or not really?

Not really.

It is about 60% up front, about 40% ratable.

Again as we look at how we integrate this transaction with ours, it will be in that range, we anticipate.

But it may swing around again, based on how we do the transitions.

But that is the number we have built in for now.

Okay.

Aart, question for you.

First, I think you may have mentioned this implicitly in your comments, but from a bookings perspective, are bookings on plan?

Above plan?

How have bookings been trending in this environment, which you acknowledged at the edge is a little bit more uncertain than it has been.

Overall, they are a bit above plan.

I mentioned the fact that we felt that our business was a bit stronger than what we had planned for.

I am always fairly relaxed about the quarter-to-quarter situation, but in general this year is unfolding quite well for us.

And that gave us additional confidence that integrated with the forward-looking model that we have, we could already make some very good comments for '09.

Okay.

Last question from me.

You mentioned progress sort of porting the multi-core, multi-threaded applications that you have coming.

I am just curious, at InVidia's last analyst meeting, they have been pushing very fine grain GPU architectures in a number of applications, and there were actually a couple of EDA start-ups talking about really big speed-ups, using these kind of architectures.

I am just curious what thoughts you have about how real or not real that is, if that is something you can do, any thoughts there would be appreciated.

Sure.

We actually have in-house a centralized effort to look at a broad set of architectures, because many of these things are promising, but they are also fairly immature, and there is going to be a broad swath from essentially duplication of the standard process of course, all the way to extremely fine grained in DDR, or heterogeneous type cores where you accelerate only a certain type of transaction.

We are engaged with Invidia, We are engaged with number of others.

It depends a little bit on which products, what is most promising, and it also depends on how supportable will this be going forward.

I think we are at the beginning of a very exciting age, which is the whole age of computing is changing, and that will open up doors for us, and having seen this coming, we did focus the entire company to make sure that all of our products have plans, and as a matter of fact, starting last year, and a lot this year, we are now rolling out practical implementation.

Good.

Thank you very much.

You are welcome.

And next we have line of Rich Valera with Needham & Company.

Please go ahead.

Thank you.

First, thank you for the initial guidance on F '09.

That is very helpful.

Aart, can you say if that assumes backlog, year-over-year backlog growth heading into fiscal '09?

I assume it would but I just kind of want to confirm that.

Well, as you know, we actually give out the backlog at the end of the year, so I actually did not make any statements on backlog, which should neither be read as positive or negative.

It is just that we want to stick to that rule.

Largely because we want to stay away from giving fine grain detail on the bookings, as we don't want to be backed into the situation of having to negotiate at the end of the quarter with customers on what they hear via Wall Street.

Having said that, clearly our backlog is one of the key assets that over time in aggregate, tends to keep growing as we want to enter the next year, consistently with about 80% of revenue in hand, the next quarter was 90% in hand, and all-in-all we are well on track with that.

Great.

And Brian, can you say will the effect of the loss of deferred revenue at Synplicity be largely over in 12 months?

Is most of that sort of a 12 month duration?

Yes it is.

That is right.

It is over a 12 month duration so obviously the rest of this year and a little bit into '09.

We should see the full natural run rate of Synplicity in the second half of next year?

Yes.

That is right.

Great.

And with respect to the Matsushita consolidation deal you just announced, I would assume, but you didn't really want to, that you increased your run rate there?

Is that a safe assumption, Aart?

Actually, I think I sort of indirectly said exactly that.

The answer is yes.

Not only did we increase the run rate, but we also broadened the product portfolio utilization.

Matsushita is an outstanding company.

Many of you may remember that they were actually the first ones that announced a production 45-nanometer chip, which probably we were involved in.

And so they have been a very good technology driver, partner, user for a number of years, and having them be in the category of preferred vendors for us is really terrific.

Great.

Just one more.

Did that booking happen after the end of the quarter?

I don't think so.

No.

No, it is in Q2.

That is in Q2.

Okay, just wanted to check that.

Thanks very much, guys.

You are welcome.

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

Please go ahead.

Yes, thanks.

Hi, guys.

Brian, you gave us the inclusion of Synplicity for this year, but as you get the deferred revenue write-down back, what should we think about the inclusion for 2009?

Well again, at this point we have provided some very preliminary views on 2009, and that performance from Synplicity as you heard, both with a partial haircut in the first part of the year, and then full run rate in the second half, combined with our run rate, is where we anticipate reaching the double-digit revenue growth again for next year.

So we have built that in, and of course we just closed the deal last week.

So as we complete both the integration work, really understand the full detail of all of the license transitions that we go through, the amount of outstanding deferred, and so ons that go through in our valuation work, we will be able to give you more detail, and we anticipate doing that at the end of the year.

Okay.

And this was the second quarter that deferred revenue actually declined sequentially.

Can you give us an update on how we should think about that?

Yes, absolutely.

Again as everyone understands, deferred revenue only includes what we have invoiced, but have not yet taken into the revenues into the quarter, and again it will fluctuate quarter-to-quarter based on the timing of the contract and the invoices.

In Q3 we expect our deferred revenue should again increase because of our annual in-advance payment from our most significant customer, that if you recall shifted from Q1 renewal dates to a Q3 contract term.

So each Q3 we would anticipate deferred revenues going up, and we anticipate seeing that in this third quarter.

Okay.

And then on the cash flow, I believe the last couple of quarters you actually talked about cash flow for the year being greater than 325, now you are talking about it being approximately 325.

Not sure if I am just nit-picking, but is there something that you are looking at a little bit differently, in terms of cash flow generation for the year?

No, we are really close to that original number.

We are saying about 325 million which we view as being on plan for the year.

It is just as we get through now the integration of a pretty significant acquisition, really understanding the full cash flow impact.

We have got a little bit of room to maneuver.

We are still committed on a 325 level for the year, which is a real strong cash flow from the operations.

Can you describe for us the currency or FX impacts on revenue and expenses, and kind of what you have included in your outlook?

Yes.

Good question.

From a revenue perspective, the Company is primarily denominated in U.S.

dollars, except for our Japanese business.

And so in a revenue perspective, you don't see any significant impact, and even from the expense side of things, based on our hedging plans, and the coverage that we provided ourselves, we see no material impact on expenses or EPS for the year.

So we are locked in for the year and do not anticipate any deterioration, based on movement in the U.S.

dollar.

All right.

Thanks, guys.

And our next question comes from the line of Terence Whalen with Citi Investment Research.

Please go ahead.

Great.

Can you hear me?

Yes.

Okay.

Great.

My question relates to the outlook for 2009 for operating expenses to grow above the expectation of half of the revenue growth.

Brian, I think you mentioned 70 to 80% of revenue growth.

Is that correct?

Yes, 50 to 75% which we see as a temporary impact, primarily related to the acquisition.

As you know, the revenue grows slower than the regular run rate was for that business, but the expenses you get immediately on day one.

Again, recognize both the haircut on the revenue side, and again, as we integrate the models with ours, that is how we help you in terms of planning the operating of the financial models as we look forward.

So just to give you an awareness that we see that ratio temporarily increasing for 2009.

And would that have been the regular below half of revenue growth without the Synplicity acquisition?

It is about that rate, that is right.

That is as we have been modeling out the year, given the visibility we have and our own targets, and again remain committed to that operating margin expansion that you have seen us on for the past few years.

We have about 300 basis point improvement this year, and forecast expanded operating margins again for '09, and then ultimately reaching that mid-to high-20s over the next few years.

So you can see us both managing that expenses in-line with the anticipated revenue growth, which has relatively high predictability to both sides of that equation.

Thanks.

And then my next question is related to the cash flow impact of Synplicity for this year.

You maintained your 325 guidance for fiscal '08 before and after the acquisition.

What is the net cash flow effect of that acquisition?

Well, the net cost of the acquisition is $181 million, net of the cash incurred as the transaction happens.

And then relative to the impact in 2008 from the Synplicity business unit as it stands, we really do not anticipate any deterioration in our cash flow.

It is about a wash for this year as we look at both the revenue projections, collections, and expense run rate that we will see.

Okay.

Then my last question maybe for Aart.

Aart, it seems like this marks the fourth major account consolidation in about as many quarters.

While looking at some competitors, we haven't seen the same level of account traction.

What, speaking for yourself, what do you attribute this string of customer traction and customer momentum that you have alluded to?

Is it technology position?

Is it a benefit of having gone to the subscription model?

Is it the current economic environment at customers?

Could you maybe add some detail there?

Thank you.

Sure.

I think there are two of the three that you mentioned that are most important.

Technology advantages and economic model.

The technology advantages are increasingly clear, as you move to smaller geometries, and thus dramatically more complex chips, and in very simple terms, if you glue together even Best-in-Class tools, you increasingly get worst in class results, and so a more and more integrated flow is an absolutely necessity to finish the chips, and finish them on schedule.

And so from that perspective there is a big advantage of teaming up with somebody, that you can trust for that.

I would add to that technical angle that the very support model is also important, meaning that we have very strong field teams, that are now increasingly involved in the finishing of chips with our customers, and it is just a substantial risk reduction mechanism for them.

Now on the other side of the equation, it is very clear that the semiconductor industry overall is looking for efficiency, and you can see that on how they structure their businesses more towards a focus on certain market segments, while that same efficiency can be driven by being much less haphazard on how they spend their money on a variety of tools.

Simply put, they get much more bang for the buck by teaming up.

So we have the economy pushing us, but the technology is really justification.

Great.

Thank you.

And nice job.

Thank you.

Thank you.

Next we have a question from the line of Jay Vleeschhouwer with Merrill Lynch.

Please go ahead.

Thanks.

Aart, I would like to explore the Synplicity transaction with the following question.

Do you regard Synplicity as being more than a medium sized or routine technology filler acquisition, and perhaps something more impactful, and if so, does it have a natural opportunity to be a nine figure business for you, where even after 14 years, and it's own acquisitions it really wasn't much more than a mid-eight figure business.

Is there a significant several tens of millions of dollar upside opportunity here, from what you are getting there?

Secondly, Brian, could you elaborate on the Japan upside in the quarter?

It was an unusually large increase, which was not correlated to any sequential change in your upfront revenues, so there must have been some larger amount, some non-linearity coming out of backlog related to your Japan business, it would seem?

Okay, Jay, first to the Synplicity situation.

Simply put, the answer is absolutely yes.

Meaning that I see multiple opportunities coming with Synplicity.

Let me start with the sort of obvious one, which is they are in a market segment that is completely adjacent, FPGA, and in all fairness has been somewhat stodgy over the last few years.

However, if you look at FPGAs, you can see that they are very rapidly adopting the most advanced design nodes, while a number of the designs are sort of languishing behind an older node.

That is another way of saying that FPGAs could well become more attractive for a set of customers, and they become even more attractive if you add to the FPGAs the Synopsys IP position, and some of our verification tools.

So that is one reason.

The second reason and I think that is one that ultimately ties even more to your comments, is the fact that Synplicity has built a very interesting rapid prototyping verification business, and it is very interesting, because it touches this interaction between hardware and software, and we have felt for quite a while that over time, the embedded software was going to become more and more of a nightmare from a productivity and predictability point of view, and that if we can add some value there, we should be able to build that business.

And so as Brian said, I think we have just closed the transaction a few days ago, and so the timeline is still quite a bit open, but fundamentally I support all of your comments whole heartedly.

Maybe, I will pick up your second point then Jay on the Japanese business.

It was extremely strong in the second quarter for us, and we named some of the wins in the quarter so far.

But it was extremely strong for us.

The other advantage we had with that is both the annual fiscal years for most Japanese companies ends in February, so we were able to close many of the deals in Japan earlier than towards the end of the quarter.

Therefore, with our ratable revenue model, we were able to get almost three full months of revenue from that, so that really helped our business pick up.

Secondly, when you look back at the business in Japan, our trailing four quarter revenue is about a 10% run rate.

So again, that is in-line with our overall revenue growth.

But again, Q2 is the big year-end, and great results that were put up.

Just a shorter term question.

First, could you comment at all on what you are seeing, in terms of unscheduled or turns business, if there is anything meaningful going on there?

And we often speak about platform or multi-product deals, but are you seeing any changes at all, in demand for large single product deals, anything of that kind?

We are all looking at each other slightly puzzled, because I think fundamentally there is nothing that stands out from that perspective.

On the other hand, there is no question that the notion of platform is becoming more and more important from our earlier comments, which is that integrated complete solutions is what customers are looking for, and so you can call it a platform.

You can also call it just more comprehensive transactions.

But we are definitely growing on the basis of customers saying the overall synopsis offering of Synopsys stands out well.

All right.

Finally, you mentioned the new router.

Could you help us understand how you foresee the adoption or migration of that, particularly in the context of earlier router initiatives from six, seven, eight years ago.

Well, we have not formally introduced the product yet, so I want to be a little bit cautious about exactly how we position it in the context of our products.

But clearly, I think we have been able to continue a strong push of technology evolution in the last few years, and what is happening in addition to that is that we are using multi-core now, much more routinely, I would say.

The fact is that the router is already in beta.

The results are excellent, and as a matter of fact, even one of our customers decided to use it for production.

So they have a high degree of confidence, and I believe it may be even mentioned in the Matsushita press release.

So this thing is well on track.

Okay.

Thank you.

You are welcome.

(OPERATOR INSTRUCTIONS).

Now we will go to the line of Matt Petkun with D.A.

Davidson and Company, please go ahead.

Hi, good afternoon.

Aart, could you comment a little bit about what is going on in your DSM part of the business?

And specifically, it looks like you guys have really been trying to build out your tool set around the TCAD product offering.

Are you relying less on the assets that you acquired from HPL on the test chip methodology for DSM?

All of your comments are sort of correct.

We are clearly focusing on those areas in the DSM or manufacturing side that have been most successful, and the TCAD offering is of increasingly broad interest at a number of places, be it in the development of new technologies, in the development of new library modules transistors, in the manufacturing itself, and then some of the cool applications literally are clearly those things that touch materials used for solar cells, power devices, illumination, and things like that.

So I think there is going to be a lot of creativity in the world around these topics, and our capability I think will be central to developing that.

On the test chip side, we have focused mostly on the yield management aspect that we got from HPL, as being the one that is more rewarding for us, so we continue to tune the offering a little bit as a function of where we see traction.

Okay.

And then Brian, I think you mentioned that you guys brought back 87 million in dollars of Synopsys shares this quarter.

How many actual shares did you buy back, or what was the average price of the buyback?

Sure.

Year-to-date, we have repurchased 7.2 million shares for $170 million.

So I think that is averaging in about a $24 range, just averaging it out.

Let's see, that is again, more than we did all of last year as well at this same point in time, so we are up good.

I think the average price in the second quarter was about $23, it was 3.8 million shares.

Okay.

Perfect.

Then just finally, Brian, another caller asked about the change in deferred, and I understand it in general that it is going to decline in certain quarters, but I am more interested in the more drastic change in the long-term deferred, and what I should be reading into that.

Oh, you are saying from the perspective of Synplicity's deferred revenues?

No, the long-term portion of your deferred revenues.

Oh.

Fell from 80 million to 65 million, so it was down 14 million whereas just the traditional deferred it was down less.

Right.

Right.

Yes, the way that is classified is your upfront deferred over the next year is in the short term, and beyond one year is there.

So really what happens, your contracts mature, they roll into the next short term perspective.

That is the one that you watch the most.

Again the movement between the two accounts in general for all of deferred revenues, is really not that material.

As I say, it is really based on the timing of the annual renewals for these contracts, and as I say, that combined number is going to go up pretty significantly in the third quarter.

Okay.

Thank you so much.

And our next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

Please go ahead.

Hi, guys.

[Casey] calling for Mahesh.

Couple of questions on the Synplicity acquisition.

What would you say one can expect to be the incremental revenue, $70 million annual run rate, what you can expect next year?

Maybe following a little bit sideways onto Jay's comment and question, already next year the contribution of Synplicity and Synopsys will be fully integrated, so we do not plan at all to follow that company in that fashion.

So from an incremental point of view it is going to be a little bit difficult to state.

We have clearly said that we will be delivering double-digit revenue, or at least that is our plan for next year.

What is clear though, is that we want to rethink how to look at Synplicity from the perspective of can we cross-sell between our respective customer bases.

How can we take advantage of the new position in FPGA with some of our other products?

And most interestingly, what can we do to accelerate the system side of that business?

I think we are sort of surrounded by opportunities, and how we will prioritize them is a function of precisely the planning that has started as of this week.

Okay.

Could you give us some broad outlines on what are some of the specific incremental products which you folks are focusing on?

Well, you mean from Synplicity?

Yes.

Well, they fundamentally have two major product lines.

One is the product line that is addressing the synthesis and the creation of FPGAs, and of course these heads towards Xilinx of their Excel as their main silicon partners, and so I think there is a lot of opportunities to broaden that relationship, because Synopsys also has a strong collection of IP blocks, and as the FPGAs become more complex, a number of these IP blocks could reside very well on FPGA.

So there is a lot of opportunity there.

The other key product line is really the one that is aimed at helping embedded software development, by virtue of creating rapid prototypes of a design, before the design is actually manufactured, so that the software guys can start developing this.

And so that is a product line called Confirma really helps in the verification of all of this.

So there as well, I think we have a lot of opportunities to accelerate adoption, because the old Synopsys field team of course, has a lot of customers that could greatly benefit from these capabilities.

Okay.

Now in the traditional product areas, could you point out to some specific areas where you folks are increasing the run rate?

Well, I mentioned earlier that increasingly our customers actually tend to buy a broad collection of our tools, because the tools work really well together, and so what we can see is that the run rate of our customers, with the vast majority of the large deals we do are increasing, and this has always been of very, very high importance when you have a ratable business model, because you essentially would like to increase the commitment of the customers steadily, as they commit for typically the next three years, and the vast majority of our deals are exactly around that timeframe.

And so for this quarter and last quarter, we have done particularly well in that direction, and that has been one of the ingredients where we are saying that in addition to the Synplicity acquisition, we have organic growth, and we see that not only were we able to increase our guidance for this year, but also give you sort of a sneak preview for next year, given that a number of people were worried that the market was not doing well for us.

So I think we are doing very well.

Okay.

And lastly from my side, is it fair to say that were one to strip out the contribution of Synplicity to Synopsys top line for fiscal '09, one would have expected a mid-single percentage revenue growth?

Well, clearly the addition of Synplicity improves things.

We are actually tracking on pretty good growth, given the overall outlook in the market and the uncertainty.

We will see exactly how much we do, by the time we deliver, and we will give you much more detailed guidance at the end of the year.

But fundamentally, we do see a healthy situation, and feel that we have quite a bit of momentum, and so we decided to share with you some of the outlook, because the combination of organic growth plus Synplicity I think bodes well for Synopsys, and as a little side note, you probably heard in our comments that we are also committed to move Synplicity rapidly to the same ops margin targets as we have set for Synopsys, and that we will continue to grow the ops margin.

So all-in-all I think we are sticking to our model, we are sticking to our plans and I think we are delivering well.

Okay.

Thank you.

At this time, we are about three minutes before the top of the hour.

That is perfect timing.

So we thank you for your attendance.

As usual, Brian and I will be available after the call, and with that, thank you very much for your support.

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

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

You may now disconnect.