新思科技 (SNPS) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Synopsys earnings conference call for the third quarter of 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 last one hour, five minutes prior to the end of the call, I'll announce the amount of time remaining in the conference.

As a reminder today's call is being recorded.

At this time I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations.

Please go ahead.

Thank you.

Good afternoon everyone.

With us today are Aart de Geus, Chairman and CEO of Synopsys; and 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 its 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 10-K, our 10-Q, for the second quarter, and in our earnings release for the third 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 and supplemental financial information can be found in our third quarter earnings release and financial supplement.

All of these items are currently available on our website at Synopsys.Com.

With that, I'll turn the call over to Aart de Geus.

Good afternoon.

I'm happy to report another solid quarter for Synopsys.

Revenue came in at $344 million, above our target range with over 90% time based license revenue.

We managed expenses well, holding spending to the low end of our range, and we delivered above target non-GAAP earnings growth of 37% yielding $0.44 per share.

We are raising non-GAAP earnings guidance for the year and expect to come in $0.08 to $0.11 higher than we anticipated at the beginning of '08.

Our technology is very strong and competitively we are clearly pulling ahead in both customer success and business execution.

Before moving through the quarters highlights let me comment on the customer and EDA environment.

The marketplace today is sending mixed signals.

While chip volumes are increasing, ASB pressure has been tough on Semiconductor growth.

Lately though, manufacturing capacity has begun to tighten up and the first half Semiconductor results came in better than many expected.

In this uncertain landscape we see some customers racing forward to gain market share, while others are holding back on their forward commitments.

One common theme is caution and selectivity in choosing suppliers they can count on for the future.

While challenging for the EDA Industry overall, this is positive for Synopsys being recognized as technically and financially very strong.

Indeed many companies will rely on us including those who have selected Synopsys as their primary partner are seeing superior productivity benefits and overall appear to be doing well themselves.

Even against a backdrop of increased caution and lengthening sales cycle Synopsys delivered strong results again and we are increasing our outlook for the rest of the fiscal year.

With the '09 market uncertainty in mind though, we are proactively outperforming on ops margin already in '08.

Our better '08 finish helps us enter '09 in a very solid position with the objective to deliver continued strong earnings even with more moderate revenue growth.

Once we complete our 2009 planning, we will provide detailed guidance with our next earnings report.

Based on backlog, pipeline, recent customer interaction and the visible struggles of our competitors, we are assuming a revenue growth rate of approximately 6 to 7%.

With a focus on market share gains and continued ops margin expansion, we estimate growing earnings into the $1.70 to $1.80 range, if the Semiconductor landscape improves all the better.

Meanwhile we're making excellent competitive headway as our product differentiation is positively impacting our business.

Not only did we recently announce that National Semiconductor selected us as their key EDA supplier and is partnering with us on our new analog mixed signal design solution, we also have a number of customers seeking our help and taking our chips which have overwhelmed competitors tools.

Clearly, Synopsys is mission critical for their success, and we are supporting them well during this time of uncertainty.

That brings me to the product and technology highlights for the quarter.

Technology is at the core of our differentiation and this year, we're doing particularly well with our existing product portfolio and in delivering a steady stream of new capability.

In core EDA, both digital and analog mixed signal are gaining competitive strength.

Starting with our digital solutions, IC Compiler is especially strong and is systematically replacing competitor tools at a number of customers.

During the Design Information Conference in June, Intel, TI ASIC, SD, Toshiba, and Onh presented testimonials about their excellent results using IC Compiler.

These companies are seeing significantly faster turnaround time and quality of results for their advanced high performance chips.

Another example is Media Tech.

Known for its wireless and digital media solutions, Media Tech adopted IC Compiler for its next generation 65 nanometer design.

Also, DAC we demonstrated our newest multi-core capability to standing room only crowds.

Products included PrimeTime, Design Compiler, and as a special surprise to our customers, our new router, Zroute.

Zroute is a brand new multi-threaded router developed from the ground up and integrated into IC Compiler.

It has delivered a 10 X increase in speed, it's easy to use and it's tuned for manufacturing friendly results.

It is notable that at its introduction, Zroute had already completed its first production take out, attesting to its great new capabilities and robustness.

We also continue to deliver enhancements throughout our low power flow including low power reference flows for the 45 nanometer common platform process as well as for UMP's 65 nanometer technology.

One example of low power success was at Oticon the leader in development of power sensitive hearing aids.

Oticon used IC Compiler's unique low power optimization in taking out its next generation VSB chipset.

Together with ARM and (inaudible - highly accented language) we also announced the industry's first comprehensive low power verification solution.

The new verification methodology captures the expertise of all three companies and enables customers to more rapidly and broadly adopt best practices for low power designs.

The integration of Synplicity is starting with positive momentum as well.

During the quarter, we introduced great new functionality in FPGA design including new physical synthesis and significant quality of result improvements for Altera's FPGA devices.

After barely three months of integration, we can already confirm that Synplicity brought to Synopsys a very strong team, excellent technology and an expanded customer base, most importantly business is right on track.

On the analog mixed signal side, we're seeing accelerating adoption of our XA technology which combines the speed of FastSPICE with the accuracy of SPICE.

This quarter, four new customers used XA in their production flow.

Let me also give you an update on our highly anticipated new custom design solution.

We are perfectly on track for launch this quarter.

The demos at DAC have the highest attendance and receive the highest scores.

Our beta partners are quite enthusiastic about the core technology, ease-of-use, ease of adoption and robustness of the product.

Stay tuned for more details shortly.

Now let me turn to our adjacencies, systems and manufacturing.

In systems, we have a solid quarter for both the IT business and for our new ASIC Rapid Prototyping system.

We saw continued product momentum with the release of new digital IP title including a SATA device controller which completes that IP family.

We also announced a major addition to our PCI Express family and added TSMC's 40 and 45 nanometer library to our designed real library portfolio.

In mixed signal IP, product accomplishments included the tape out of a new TSMC analog USB core and the release of new DVR capabilities.

Demand for our conformer router prototyping system is high as well as customers are beginning to migrate to our off the shelf solution rather than make their own costly custom boards.

During the quarter, we announced hardware and software enhancements including the much anticipated Identify Pro debug technology and market expanding interface applications such as PCI Express and SATA.

In manufacturing our TCAD solutions are finding increasingly broad end markets, they are recognizing the benefits of our nanoscale simulation technology.

Kodak, the world leader in image sensors adopted our TCAD to support its research and environment of new product as high image resolution requires very complex simulation.

In the mask area we introduced a new release of Proteus which delivers key ease-of-use features and further flow integration enabling concurrent processing of manufacturing applications.

In summary, Synopsys is executing very well, notwithstanding the turbulent landscape around us.

We see four key elements contributing to our strong outlook.

Excellent technology and product pipeline with visible competitive momentum, strong scalable global customer support executing well on a growing number of primary vendor collaborations, a conservative time aid business model that helps us navigate in uncertain waters while supporting investments for future growth and finally a strong and motivated team focused on growing our value to our customers.

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

Thank you, Aart, and good afternoon, everyone.

In my comments today I'll summarize our financial results for the quarter and provide you with our 2008 guidance.

As a reminder I'll 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.

As Aart mentioned Q3 financial results were solid.

We delivered double digit growth in both revenue and earnings, generated considerable operating cash flow and expanded non-GAAP operating margins all under our consistent business model.

Let me now provide some additional detail on our financials.

Total revenue increased 13% to $344 million, above our target range with strength across many areas of the business.

Our core EDA platform continues to perform well and achieve double digit revenue growth for the trailing four quarters.

As expected Synplicity revenue contribution was fairly modest primarily reflecting a purchase accounting haircut that supplies to the deferred revenue.

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

Turning to expenses, total non-GAAP costs and expenses were $261.5 million an expected increase due mainly to our Synplicity acquisition but at the low end of our target range due to timing of expenses and overall cost control.

As a result non-GAAP operating margin was 24% during the quarter, an increase of more than 500 basis points.

Turning now, to earnings, GAAP earnings per share were $0.39 with costs and expenses totaling $294 million.

This included $11 million of amortization of our intangible assets, $17 million of share based compensation, $4.8 million of IP R&D associated with Synplicity, and a one-time $17 million GAAP only tax benefit associated with the IRS settlement that we first announced in December of 2007.

We're pleased that we resolved this $477 million tax issue for fiscal years 2000 and 2001.

Now in a similar vein, as part of a routine examination of 2002 to 2004 returns, the IRS recently proposed adjustments which would total approximately $250 million in additional taxes, primarily associated with our acquisition of Avanti.

As with the previous case we filed a protest, we believe the claim is without merit, and that we are fully reserved.

As you know resolution of these routine issues can typically take a long time and we'll provide more detail in our third quarter 10-Q to be filed next month.

Now turning back to earnings, non-GAAP earnings per share increased 37% to $0.44 exceeding our target range.

As a result of this solid execution, we are raising our annual earnings guidance.

Our non-GAAP tax rate was approximately 25%, slightly below our target range.

For the entire year we continue to 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 6% of total within our target range of less than 10%.

And as expected greater than 90% of Q3 revenue came from beginning of quarter backlog.

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 totaled $877 million, up $60 million sequentially even with our all cash purchase of Synplicity during the quarter.

We generated $231 million in cash from Operations including an expected annual payment from a large customer.

Capital expenditures were $7 million.

We did not repurchase stock in the quarter and have approximately $260 million remaining on our current authorization and as always we'll evaluate the best uses of cash each quarter including Company operations, investments and stock repurchases.

Q3 net accounts receivable totaled $144 million and we maintained industry leading DSOs of 38 days reflecting the high quality of our AR portfolio and the timing of invoices.

Deferred revenue at the end of the quarter was $657 million, an expected sequential increase due to the large annual payment I mentioned earlier.

We ended Q3 with approximately 5650 employees, a year-over-year and sequential increase due primarily to our acquisition of Synplicity.

Before moving on to guidance let me provide some additional commentary around Synplicity.

The acquisition has been enthusiastically received by our customers and integration efforts are progressing well from a business, process and employee perspective.

For reporting purposes, you'll notice we've adjusted our financial supplement to reflect the inclusion of Synplicity in the appropriate product groups.

Within core EDA we've added Synplicity products associated with FPGA Design.

Within IP and systems we've added the products associated with ASIC Rapid Prototyping and DSP.

Now moving on to guidance.

For the fourth quarter of FY '08 our targets are revenue between 348 million and $356 million.

Total GAAP costs and expenses between 295 million and $310 million which includes approximately $13 million of share based compensation expense.

Total non-GAAP costs and expenses between 273 million and $283 million.

Other income and expense between 0 and 3 million.

A non-GAAP tax rate of approximately 27%.

Outstanding shares between 147 million and 152 million.

GAAP earnings of $0.23 to $0.29 per share, and non-GAAP earnings of $0.36 to $0.39 per share and we expect greater than 90% of the quarter's revenue to come from backlog.

Now our fiscal 2008 outlook.

We're raising the bottom end of our revenue range with our new target between 1.332 billion and $1.340 billion.

A non-GAAP tax rate of approximately 26%, outstanding shares between 147 million and 150 million, GAAP earnings per share between $1.20 and $1.26 which includes the impact of approximately $64 million in share based compensation expense.

Non-GAAP earnings per share of $1.65 to $1.68.

We've increased the low end of our guidance range by $0.05 and the top end of the guidance range by $0.04.

Now that we're in our fourth quarter, we refined our cash flow from operations target to 300 million to $325 million.

We will provide 2009 guidance in our next earnings call reporting our fourth quarter results.

To conclude, I'm pleased with another quarter of consistent execution and solid financial results highlighted by top and bottom line growth, operating margin expansion, and solid cash flow generation.

With that, I'll turn it over to the Operator for questions.

Thank you.

(OPERATOR INSTRUCTIONS) We have a question from the line of Rich Valera with Needham & Company.

Please go ahead.

Thank you, good afternoon, gentlemen.

Wanted to sort of get your thoughts on the sort of incremental change in the environment, Aart.

It sounds maybe from our comments that on the margin over the last three months things have gotten maybe a little more challenging in the EDA space.

Just wanted to get your color on that and also last quarter you were good enough to provide some sort of preliminary fiscal '09 guidance and just wanted to sort of get your thoughts on that.

I know it wasn't formal but wanted to get your feel for how you feel about that guidance at this point?

Sure, Rich.

I think you characterized it correctly.

I think it's incremental.

We are certainly not in the school of saying there are very massive changes suddenly occurring.

I do think that the entire Semiconductor industry is sort of looking forward saying well what happens to the overall economy and when will that really hit us but meanwhile keeps delivering all in all reasonable quarters and so on the basis of reasonably okay results, but a careful look, people are cautious as they commit going forward, and we see some customer nervousness towards committing for a long period of time.

Now clearly that has had some impact on the EDA industry although I think a number of the changes that you saw recently were only marginally related to the economy.

We have picked up a number of these signs and therefore are a bit careful ourselves and I forget who asked it a few quarters ago if we picked up the slightest signs would we immediately take some action on the expense side, well, we already did, and in that sense, we are preparing well for the coming year.

I gave in the preamble some initial indications of our planning right now assuming a 6 to 7% revenue growth and our initial estimates of the non-GAAP EPS to be in the $1.70 to $1.80 range.

Now bear in mind we haven't finished our planning, there are a lot of things changing but overall we're just doing incredibly well in what appears to be a very turbulent EDA industry and certainly a somewhat turbulent semiconductor industry.

Great, and then Brian, with respect to the cash from operations, what was the driver for taking that down a bit from the 325 I think to the 300 to the 325?

Yes, as we're now approaching, of course, deep into the fourth quarter and getting ready for year-end, we're just looking at refining our cash flow from operations target slightly.

So we're still working hard to bring it in, but given it's the end of the year and you look at timing of payments and collections we just wanted to align it properly with our current forecast.

Okay, thank you.

Our next question from the line of Raj Seth with Cowen & Co.

Hi, if I could follow-up on the last question, Brian.

As you look into '09, how should we think about I know it's preliminary but how should we think about cash flow in '09 and Aart, as it relates to bookings in the current quarter, did bookings come in as you expected or were they a little weaker?

Are you anticipating in the fourth quarter slightly weaker bookings than you might have forecast three months ago given the commentary on the environment or I'm just trying to reconcile this slightly different or somewhat different '09 outlook with how bookings currently are coming in?

Raj, maybe I'll handle the first question on the cash flow for '09.

What we're looking at there we haven't provided all of the final details of the profile but the biggest element to track is the net income item, and as you look at that and look at the effective tax rates we've been able to produce, that's a pretty good representation for us relative to this years performance, our operating cash flow, so other than that when you look at balance sheets and what comes in the quarter, what gets deferred, the net income is the most consistent element to track on a year-over-year basis and we'll give you all of the details of that in three more months when we do our year-end call.

Sure, Brian if I could follow-up just a little bit, forgive me, Aart.

How should we as we exit this year think about backlog given the large Intel deal some time ago what's the appropriate way to think about how backlog should look coming out of this year?

Yes, we'll provide the specific numbers for the backlog at the end of this year and then from there of course you see the levels of revenue and bookings associated with it and I think the most important item to remember is that we continue to enter each quarter with more than 90% of the quarter locked up and then we also have each year approached the coming year with more than 80% of the incoming year relative to the amount of bookings coverage and revenue coverage that we have and we're not anticipating 2009 to be any different.

We're right on track for that.

Brian given all that should backlog go up?

Yes, that's the answer that we'll be giving you in December, Raj, we're working it through.

We don't comment quarterly on the bookings and the backlog impact.

But again, we're working hard to work on it and we'll give you the final answers as we exit the fourth quarter with all the year wrapped up.

Let me answer the other question that we also never answer which is we don't comment on the bookings of the quarter but let me comment, for the year we're looking that we're on track against our plans, so in that sense there's nothing out of the ordinary.

We did pick up though with a number of customers suddenly just a sheer number of signatures was increasing.

We saw a number of places that the process took longer and that people were a little worried about the out years and so what that tells us is that people are just conscience -- cautious sorry, about how they look at the longer term, and we want to make sure that we keep signing up run rate growth business and that's why we are tempering a little bit our expectations for '09 but having said that, the more I see the announcements around us, the better I feel about the position that we have and having seen how well the technology is doing at a number of places as people become more selective, I think Synopsys tends to bubble up to the top of their choice list.

Thank you.

You're welcome.

Our next question from the line of Matt Petkun with D.A.

Davidson & Company.

Please go ahead.

Hi, good afternoon.

Aart, the sequential increase in the up front revenues, would you associate that -- obviously that bounces around quarter to quarter but is much of that associated with the Synplicity business?

Yes, Brian is probably better equipped to answer this question than I am because I haven't even noticed there was a significant uptick there or was there.

Synplicity suddenly is a little bit more up front than what we have but I think over time that will just blend into the rest of our business anyway.

Yes, and from a data point perspective it's at 6%.

Our target is to maintain it at less than 10% and 6% is exactly what we hit for last year's up front ratio, so no change there, and then just looking at timing of it in Q1 and Q2 around about 4, we'd anticipate it being in the 5 to 6% range for the total year inclusive of Synplicity which has the hardware element in there which will be taken up front.

Okay, and then I know it's difficult to talk about the pricing environment but Aart is there any reason given maybe the blood in the water that we've seen in other elements of the space why you might want to be more aggressive with pricing in this current environment?

Well, yes, I think the blood in the water description is somewhat accurate in a time of a lot of change.

We immediately focus I think that the move of one of our major competitors towards a ratable model I think is very very positive.

I think it's a much healthier business model for the industry.

I wouldn't be surprised that if over time more people were to go there.

Having said that, I think most of our growth and opportunities lies with the fact that we just have stellar technology right now and that we're really seeing the difference.

And so from that perspective, yes, we can be aggressive.

From the perspective of pricing, at the end of the day, we make sure that we grow our run rate.

That is what in the long term will grow our business and obviously we can work the flexibility but jumping to pricing, it's hard to jump back away from it later so I think we're prudent and conservative

Good to hear and then just finally, Brian, the implied non-GAAP guidance for next year, what tax rate are you assuming for those earnings?

Yes, we've assumed a 28% tax rate.

So going up to 28 from the 26, okay that's what I thought.

Okay, thank you so much.

You're welcome.

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

Please go ahead.

Thanks, good afternoon.

First, a clarification on Q3.

Brian can you comment on the sequential increase in Japan, was that too related to the Synplicity acquisition or perhaps was it carryover from previous quarters' Synopsys bookings?

Yes, that's a great question.

Our performance in Japan was very strong and in fact you can see 22% growth over our last four quarters in Japan, but revenue by product platform or even geography does tend to fluctuate a little bit from quarter to quarter based on the mix of those contracts.

In the quarter there was a couple of due unpayables that came into Japan consistent with the way a number of those accounts have been handled in the past and we're right on track with that so other than that we're real happy with the performance in Japan.

A couple of technology questions.

First, are the new DC and IC Compiler releases still on track for next month as you commented at DAC and similarly is the new release of PrimeTime still set for December?

Very simply put, the answer is, yes.

So I think things are actually moving along very nicely in technology, and the products that you mentioned obviously are core anchor products in our business.

Actually, I have an interesting little side note because you will recall that about three years ago, we said that 80% of Astro would be replaced by IC Compiler so this morning I asked the team where we were and turns out that we are a bit over 75% overall and for all of the advanced nodes or not even that advanced, 90 nanometer and below we're well above that and so I think IC Compiler has done very very well in the last couple of years.

So you've given that penetration rate, when you look into '09 and 2010, what's next then do you think in terms of the most incremental product growth drivers in terms of licenses or contributors to growing the pools for run rate purposes?

Well, we do have some stellar technology advancements.

I mentioned Zroute which is interesting because it's really one of the core modules that IC Compiler makes a big difference that is now going to be rolled out substantially to a number of people.

We also actually see that the adoption rate of IC Compiler specifically is continuing at a number of customers where we are over time replacing other competitors.

So from that perspective alone, I think there's the core EDA will remain very strong for us, and of course that's good news because that's such a large portion of our business.

All right, and with respect to other market indicators, do you still feel that semi R&D is perhaps the closest or be it imperfect proxy or what else would you be looking at?

I think both the word closest and imperfect apply here as we have said for a long time because in many ways the R&D investments are the ones that have the longest time frame.

Even with volume or ASPs going up and down, the one thing that doesn't change all that much is the number of engineers working on advanced chips so from that perspective a high degree of visibility.

At the same time it's very clear that some of the R&D investments are changing in the semiconductor industry by virtue of a number of companies getting out of the manufacturing and the new technology development themselves.

We certainly hope that some of that money will be used to achieve more on the design side which is good for us and some of that money is also clearly going towards essentially efficiency for the Semiconductor industry and you see many other changes to that effect.

So we're sitting in the middle of that with customers that are a bit nervous and yet at the same time have to commit for multi-years so they're looking at us in terms of not only the present strength of technology but also the pipeline going forward and being strongly anchored in the future nodes already I think suits us very very well as they make their decisions.

All right, and lastly, if the environment were to worsen before it gets better, let's say, how do you think that might manifest itself in terms of contract durations?

Can you hold three years?

Do you think you might see a preference towards shorter or even perhaps longer because of the consolidation effect?

It's a very good question.

First the premise.

At this point in time I do not see it worsening a lot.

I think one could see turbulence meaning that some companies may do particularly well and others poorly and so you see more defraction and the same is true in of course our market.

Secondly, you pointed out that there's sort of two pathways which is yes, get people to sign up more with you.

The challenge to that is if you go too long you tend to be able to sign them up but not necessarily get as much run rate growth over the period of time as desired or as reflective of the strength of the technology.

Lastly, on holding the three year, we have been holding the three year remarkably well and partially it's just another element of the ability of our business model and I think it fits pretty well the [Gestalt] of the semiconductor industry.

Okay, thanks for the Gestalt, Aart.

Tossed it in just for you.

(OPERATOR INSTRUCTIONS) We go next to the line of Terence Whalen with Citi Investment Research.

Great.

Thank you for taking my question.

I don't know if I missed this but I believe you said you had a 10% customer.

Was wondering if you could give a more specific number on what that customer was this quarter?

Thank you.

Well, we never disclose specifically what the customers are.

Most people have followed us for a number of years and who understand that there's some semiconductor guys that are very large have figured out that we will on an ongoing basis have essentially a 10% customer because the revenue is recognized on a ratable fashion, it's actually not a this quarter type of question.

It's a deal that we did last year that will last for a number of years and so you will see it reoccurring pretty much every quarter.

Okay, great and with regard to the cash flow number, can you remind us what the target was last quarter and then update us on specifically what has changed?

And I apologize if this has already been mentioned but I didn't understand it fully.

Thank you.

Okay, sure, Terence.

The target that we had in our last quarter that we would work to achieve approximately $325 million of operating cash flow in the year, the current perspective is that number would range between 300 and 325 and even when we look at our free cash flow number working to try to improve that as well it brings into a range of about 260 to 285 on a free cash flow basis inclusive of the CapEx spending which we've taken down pretty significantly year-over-year.

From the reason that it's in that 300 to 325 range, it's just that we're at the end of our fourth quarter, getting into the fourth quarter and approaching year-end and we've been able to refine the exact cash flow anticipated by account and look at our payment out flows that are scheduled to happen and just giving ourselves a little bit of a range using that 300 to 325 so that we hit it.

Okay.

And then lastly, I think this might be for Aart.

Aart, I think you mentioned in your prepared comments that the sales cycle was lengthening and you've alluded toward incremental cautioning on the part of customers.

Can you give us more specificity?

is this just general customer reservation or is it related to customers that might be restructuring parts of their business or could you give us a little bit more color on why the sales cycle is lengthening?

Sure.

And I don't want to overstate it because sales cycles lengthening sounds like a big deal.

It's almost more like in sales situations that are heading towards closure, you certainly get two, three, four weeks more signature loops than anything else, and that says one thing, that says typically that the approval is going up one or two levels in the Company or that everything goes through the desk of the CFO.

Secondly, when you said does it apply to companies that are restructuring, it feels to me almost like the entire semiconductor industry is constantly restructuring a little bit, not with the gravitas normally associated with that word, but rather with the objective of trying to line up businesses that are a little bit more critical mass in the submarket segment.

It's interesting just this morning to hear the announcement that Ericsson and ST are teaming up in the mobile domain and this is a mere three months later after ST and NXP teamed up, and now ST is picking over that piece.

So those are good examples of changes that then bring about the well how do you do the deals?

How do you transition the contracts, et cetera, et cetera, and it is more turbulence is probably the best word rather than really a sales cycle lengthening and so maybe I use words that were a little bit too heavy for the situation.

Okay.

I appreciate that color and last one for me is regarding buyback, zero buyback this quarter.

After having had some consistent buyback in the prior quarters, was wondering what caused that near term and how you think about that and then also longer term obviously with the cash balance you have and targets really in this space being slightly smaller how do you think about cash longer term to perhaps enhance the return on equity?

Thank you.

Okay, yes.

On our cash flows as we mentioned this quarter we didn't buy any stock back but we have been very aggressive throughout 2008.

We've purchased 7.2 million shares for $170 million which is more than the 5.7 million we bought for all of FY '07 and then in addition, considering uses of cash, we paid $181 million out of the cash at Synplicity to acquire that Company in the third quarter so that was a significant investment.

And again, we keep all of those options open whether we're going to be using our internal operations to invest that cash or whether we're looking at buybacks or M&A, we just continue to look at that and we still have $260 million remaining on the current authorization, so again, we're doing all we can in this area to improve our shareholder value and look at the right investment for the highest return.

And then longer term perhaps the cash balance, especially if you're looking at deceleration, would you think more about trying to enhance increases in return on equity?

Thank you.

Oh, absolutely.

Always focus on improving return on equity, through both earnings per share improvement, translating through operating margin and revenue growth all which we have again addressed for 2009 and looking at the performance for 2008 as far as improving shareholder value and enhancing return on equity, again, a very heavy investment in stock buybacks in comparison to year-over-year.

We've continued to look at buybacks as an important area but as you can tell we just did our largest acquisition in several years with the acquisition of Synplicity so longer term really don't forecast a change.

Just what are the right options, we continue to be a very significant cash generator with our business and we're going to look for the right returns for us that are going to enhance that shareholder value.

And then I'm sorry this is my last one I promise.

You did mention the large acquisition of Synplicity.

It seems like that's been integrated fairly well here.

What is your appetite for other larger acquisitions in the space obviously given the high profile activities of the past quarter with competitors, thank you.

Well, this is another one of those where in principal, we never comment about any potential M&A.

Let me add to Synplicity.

I think this was a very good acquisition because it's a combination of what is a very strong team; it is -- a slice of its business is in a very adjacent market to where we were, the FPGA market which I think holds promise from another perspective which is they are very rapidly moving to the advanced technology nodes, more rapidly than some of the mainstream ASICS therefore there's more opportunity there and of course there was also slides attached to the rapid prototyping that fits in extremely well in our overall system strategy.

So so far this is turning out to be a very good move and integrations don't take just three months.

It takes longer than that but when the first three months go particularly well that is a very good indicator for the future.

Having said that, adding to Brian's comments it is very good to have cash in a time where there's a lot of turbulence and obviously we will be looking at opportunities as they show up and of course Synopsys is an opportunity as well.

So, no further comments really beyond that.

Okay, thank you and best of luck.

Thank you.

Our next question from the line of Mahesh Sanganeria with RBC Capital Markets.

Hi, guys, this is [Casey] calling for Mahesh.

A couple of quick questions.

When you guys talk about sort of the increased caution in your outlook for '09, how should we sort of demarket that caution between smaller sized projects which I expect from customers versus possibly some of your customers pushing out their purchase of your more advanced tools?

So I don't think they're going to push out advanced tools at all because the very way to do well and to survive is to execute well on your advanced projects where most of the money is made, most of the profitability is there and granted also most of the risk is there.

So in that context, I expect that if our caution is warranted that customers are going to be more selective in who they work with in trying to have closer relationships with those providers because a side of the spot where there's the human capital we put to bear on making chips successful is actually quite significant, and it's not a surprise to me that a number of the people that have become our partners and for which we are primary vendors have actually had significant success with some of their advanced chips because of the close collaboration.

So it's coming mostly from that angle.

At the same time we clearly watch the turbulence in our market and therefore, we want to set expectations that we think we can live up to well and given the strength that we have we're going to race forward.

Okay, if I could follow-up quickly my question, if I understand you correctly, (inaudible) next year and if you look at your customers outside the leading edge customers, are you guys finding that the pace of transition of the process nodes is going according to what you anticipated let's say three to six months back?

This question has come up now a number of times and let me debunk a few things.

I think one that needs to look at two categories.

One is the category of people that differentiate themselves because they put more functionality on chips, they drive the state up and so on and I would say fundamentally there's no change there.

At times I've given you the design starts for the more advanced nodes, if you look at 45 nanometer that went up again this quarter from last quarter 159 active designs to now 186 and the number of phase outs is moving up as well.

We also already see now an increasingly rapid uptake at 32 nanometer and some other advanced nodes that I can't really comment about.

So on the advanced side this thing is still moving very very rapidly and those are the people that actually drive the bulk of the spending in EDA.

In the more mainstream or fast forward/mainstream, there what we see is an interesting phenomenon which is that some of the older nodes are hanging around a little longer which does not mean that this is not advanced design because a number of customers take some of the older nodes let's say a 130 nanometer and just squeezing much harder to try to get the max functionality in the area and mostly driven by cost, and so if they can do that with a cheaper technology, good for them but it can be quite demanding there as well.

Interestingly enough, we see IC Compiler for example, being used in both situations to people that really want to do one more pass on their 130 nanometer chip as well as the people that are really driving a 32 nanometer chip, so I think Moore's Law in that sense is alive and well and we are a part of keeping it alive.

All right, okay.

Last question for me, can you talk a little bit about your custom design platform?

Sure.

We started with some hints about three quarters or four quarters ago that we have such projects in the works.

We said at that time that end of last calendar year, if I remember well, we would go into beta.

We did that.

Betas have progressed well and their product has become more and more solid and as a matter of fact it compares well in robustness to some of the new offerings from the competition and at that time we said we would introduce it during the year, we were purposely a little vague it was the fiscal year or the calendar year we are sharper now and it will be during the fiscal year which means we will introduce it this quarter.

We haven't introduced it so we can't say too much.

It should be clear that our objective is not to do a carbon copy of what others have but rather learn from what has been an evolution of 25, 30 years in analog mixed signal design, make sure that we have a strong basis upon which we can build for the future but also deal with some of the issues that some of the existing tools have had for a long period of time so that customers immediately see some pointed benefits and so far it appears that we are well on track with that effort.

Okay, thank you.

You're welcome.

Thank you.

I'll now turn it back to our presenters for any closing remarks.

Well, I think at this point in time we are done for this session.

We appreciate your time and your support over the last quarter.

You've obviously seen a very interesting and somewhat moving set of changes in our industry, at the same time it's very clear that Synopsys is a pillar of solidity I hope and that we are clearly building on that and are looking forward with quite a bit of confidence and so with that, Brian and I are available after the call as usual and we appreciate your time with us.

Bye-bye.

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