新思科技 (SNPS) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Synopsys Incorporated earnings conference call for the fourth quarter and 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 will announce the amount of time remaining in the conference.

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

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

Please go ahead.

Thank you, Sandy.

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.

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 third quarter, and in our earnings release for the fourth 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 fourth quarter earnings release and financial supplement.

All of these items are currently available on our web site at Synopsys.com.

With that, I will turn the call over to Aart de Genus.

Good afternoon.

I am happy to report a strong Q4 and fiscal '08, strong technology and competitive momentum, and most notable in this environment, strong revenue backlog for fiscal '09.

Let me begin with our financial results.

In Q4 and fiscal '08, we either met or exceeded virtually all of our goals despite a marked change in the environment starting in mid summer.

Specifically, we delivered non-GAAP earnings per share of $0.43 for the quarter and $1.71 for the year.

That's $0.14 above the mid point target we communicated at the beginning of '08.

With Q4 revenue of $353 million, we grew our business 10% for the year, to $1.337 billion.

These results were achieved under a predictable business model with more than 90% time-based revenue.

Through disciplined expense control and focus on efficiency, we improved non-GAAP Ops margin over last year from 20 to 23%.

We exited the year with over $900 million in cash and no debt.

While we grew our overall backlog, most importantly, or one-year backlog is almost $1.2 billion, in other words, we have over 80% of 2009's targeted revenue already in hand.

Our excellent results in '08 provided a uniquely solid foundation going into '09, especially in the context of a global economy that is highly unpredictable.

Our working assumption is that the current recession is likely to last through at least 2009.

Consumers and business caution are already leading to more conservative spending and demand for electronics will certainly be affected.

Not surprisingly, cost management is key for our customers, as they revisit every aspect of their operations for efficiency and strategic effectiveness.

In many ways, the economic stress is accelerating efficiency initiatives that have been visible for a while, such as the move from internal manufacturing to external foundries for example.

The last two years, we have also seen increased segment consolidation as customers seek efficiency through market share gain where they have strong offerings.

At the same time, they cannot on technology and today's chips require advanced EDA capabilities.

To balance cost and efficiency, we see customers actively reducing the number of their suppliers and choosing key partners that are technically strong, financially healthy, and safe and that can help reduce design costs in the overall design flow.

This is why Synopsys is uniquely well positioned to be the partner of choice.

One, we are financially stable with a strong cash position, no debt, good cash flow, strong backlog and a conservative business model, making us a stable partner as customers actively derisk their future.

Two, we have strong well integrated technology and a comprehensive solution that is complimented by crucial IP and very experienced global support ready to help customers streamline they're overall cost of design and three, we have the strategic vision and resources to continue to invest in the key technologies of the future.

Indeed the last 18 months, a growing number of customers have chosen preferred relationships with Synopsys.

In Q4, we announced another primary partner relationship with Sanyo, who chose to standardize on our design and verification platforms.

We also expanded to other large customer relationships, one of which is scheduled to become a primary partner relationship over time.

Within these companies we are displacing competitors in place and route, functional verification, custom design, and physical verification.

Going forward we plan to come out on the present economic slump an even stronger company.

To that end, our strategy is best characterized as both cautious and bold.

Our objectives are to financially out execute others by adapting to the new landscape while fundamentally staying the course in terms of business model and financial principles.

To competitively solidify and expand our position to the most cost efficient complete design solutions and to strategically invest to expand our total addressable market.

What this means financially for '09 is the following, solid revenue growth of approximately 5%, starting with the unique foundation of over 80% of '09 revenue in hand today.

Steady operating margin around 23%, driven by active cost reductions and pointed investments to further strengthen our competitive position.

And continued solid non-GAAP earnings per share in a $1.60 to $1.72 range.

Brain will provide more detail guidance in a moment.

Let me comment, that our guidance is in broad ranges than we have typically given, reflecting the market uncertainty but also to give us more freedom and execution as opportunities may arise.

Moving on to the competitive landscape.

We are uniquely well positioned to provide a comprehensive solution as customers seek to simplify their EDA commitments.

Those of you that have followed Synopsys for some time, know we have spent years moving to go a complete solution by developing, acquiring and integrating best-in-class tools from the system level through simulation, synthesis, place in route, all the way down to the physics of manufacturing.

After that a strong semiconductor IP portfolio and a global support force capable of assisting with the most difficult designs in the world and Synopsys stands out as the lead contender for our customers EDA needs.

The strength of our technology portfolio has been crucial in growing the trust of our customers as the select preferred partners.

In 2008, we delivered a multitude of technology advances, ranging from broad support of multicore processing to expanded low power capability.

Our physical design solution, IC Compiler was further strengthened by a brand new router, delivering 10X faster performance and better quality of results.

We are seeing significant customer wins including business from competitors.

On the manufacturing side, we also integrated formerly separate pre-manufacturing steps, mass synthesis and mass data prep, giving customers a dramatic and highly different shaded improvement in overall throughput.

This brings me to the third tenant of our strategy.

Focus investments in our long-term growth.

In practice this means three things, solidifying our core EDA anchor solutions and expanding our customer presence.

Rolling out our analog custom design solution, thus filling the last meaning hole in our offering and investing in the emerging system level solutions area.

I already mentioned some of the progress made on our traditional anchor products but the highlight for Q4 was a roll out of Custom Designer, our long-awaited analog mixed signal design solution.

Custom Designer is a modern open platform, built to link well with IC Compiler and other Synopsys solutions.

It is easy to use, easy to adopt and has a large number of different shaded features that surpass all competitive technologies.

Customer feedback has been excellent, especially regarding the ease of adoption and stability of the code.

Even with limited customer availability, we had our first orders in Q4.

Our IP business also deserves mention.

We not only added a significant collection of new cores to our offering but also grew the business as outsourcing semiconductor IP for cost reasons is becomes more main stream.

Finally, our FPGA based rapid prototyping system is seeing excellent momentum.

Aimed agent both chip verification and embedded software development our solution goes straight to the heart of one of the key costs and time challenges in modern chip and system design.

On monday, we announced that we were acquiring the the CHIPit assets ProDesign, a significant broadening of our rapid prototyping offering that plays well into our long-term vision of moving further toward system level design and verification.

In summary, and notwithstanding the macro economic challenges, we will continue to invest in these areas of opportunity for Synopsys.

To conclude, we had an outstanding 2008 in every key financial and operational metric.

Even with the economic stress around us, Synopsys is heading into 2009 with a very solid financial, technical, and business foundation.

Our strategy for 2009 is simple.

We intend to weather the storm and take advantage of the near-term recession and come out of the other side even stronger by being a financially conservative, competitively aggressive, and strategically focused.

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

Thank you, Aart and good afternoon, everyone.

My comments today, I will summarize our financial results for the quarter and year-end and provide you with more details for our 2009 guidance.

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 the web site.

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

Synopsys delivered solid fourth quarter and full-fiscal year results, executing well on many fronts, in fact, our consistent performance throughout the year enabled us to meet or exceed all of our original 2008 targets including revenue, operating margin, EPS and operating cash flow.

Now let me provide some additional details on our financials.

Q4 revenue increased 12% to $352.8 million, and annual revenue grew 10% to $1.337 billion.

One customer, accounted for slightly more than 10% of Q4 and fiscal year revenue.

Turning to expenses, Q4 GAAP expenses were $287.5 million, which included $9.3 million of amortization of intangible assets and $14.7 million of share-based compensation.

For the year, GAAP expenses were $1.118 billion which included $44.1 million of amortization of intangible assets and $65.5 million of share-based compensation.

Total non-GAAP costs and expenses were $280.5 million in Q4 and $1.026 billion for all of 2008.

We held cost in line with our original 2008 expense budget even with the addition of Simplicity.

For all of fiscal 2008, we achieved our operating margin target of 23%, an increase of about 300 basis points in Q4 non-GAAP operating margin was 20.5%.

We continue to drive company-wide operational discipline and expense control.

Our strategy, as Aart mentioned is to reduce expenses in certain areas so we are able to invest in others that will drive long-term growth.

In FY '08, we focused on the design and development phase of re-engineering our entire quote to cash process to maximum efficiency.

We hired in lower cost geographies and we reduced capital spending by 13% as we centralized IT resource management.

Turning now to earnings.

GAAP earnings per share were $0.32 for quarter and $1.29 for the year.

Non-GAAP earnings per share were $0.43 for the quarter, and $1.71 for the year.

Both above 2007 levels and our target ranges for 2008, driven by solid top line growth, expense management, and lower taxes.

Our non-GAAP tax rate was 21.3% in Q4 and 24.1% for the full year.

Both well below our target ranges due primarily to the reenactment of the Federal R&D Tax Credit in the United States in Q4 and certain one-time tax adjustments.

Our revenue visibility remains strong.

Up front revenue was 4-- was 7% in Q4 and 5% for all of FY '08, well within our range of less than 10%.

The average length of our renewable customer license commitments for the quarter and fiscal year remained approximately three years.

As Aart mentioned, we have greater than 80% of revenue in hand for the coming year and more than 90% for the coming quarter.

We increased overall backlog with a book-to-bill slightly higher than 1.

Now turning to our cash and balance sheet items.

At year-end, cash and short-term investments totaled $951 million, up $74 million sequentially due to a strong operating cash flow of $114 million.

For the year, operating cash flow was $331 million, meeting our original target established in December of '07.

Of our total cash balance, 53% is in the US and 47% is outside the US.

In terms of cash flow, we believe a fairly good indicator of operating cash flow over time is EBITDA.

While of course it is not a perfect indicator, operating cash flow tends to fluctuate around longer-term EBITDA trends.

At this time, we are targeting operating cash flow of approximately 200 to $220 million in FY '09.

The decline from '08 is due to both less scheduled collections and increased disbursements.

On the collection side, the slightly lower level is primarily driven by three factors, first, because of scheduled renewals in '09, we are planning for a book-to-bill moderately lower than 1.

Second, we thought it was prudent to collect as much cash as possible in '08 and third, while we haven't seen a material change in our customers ability to pay us, we are being conservative in our cash collection assumption given the uncertain economic environment.

From the cash outflow side, we currently expecting higher payments due to increased expenses including a full-year impact from Simplicity and higher tax payments.

Having said that, our cash flow continues to be very strong and based on our current expectations we expect EBITDA to be roughly flat in fiscal 2009.

Given the volatility in the global financial markets, I would also like to take a minute on this call to comment on our cash portfolio as it relates to our investment guidelines and strategies.

Our Board requires that all our holdings have very high credit rating of AA or better.

As a result, we invest our domestic cash exclusively in highly rated municipal bonds and tax exempt, AAA rated money market funds that hold municipal securities.

Our cash outside the US is invested in AAA rated money market funds and time deposits with what we consider healthy financial institutions.

And finally, we have had no exposure to auction-rate securities or mortgage-backed securities and are very pleased with the high quality and conservative risk profile of our investment portfolio.

Now continuing on with our cash and balance sheet items.

Capital Expenditures were 12 million in the quarter and 39 million for the year.

In Q4, we purchased 2.4 million shares of Synopsys stock for $50 million.

For the full fiscal year, we purchased 9.6 million shares for $220 million spending 75% of our '08 free cash flow and buying back about twice as many shares as we issued during the year.

We have approximately 210 million remaining on our current authorization.

Also recall, that we spent a net 181 million in cash on our acquisition of Simplicity in Q3.

Both the stock buyback and the Simplicity acquisition were sourced from our US cash reserves.

Q4 net accounts receivable totaled 147 million our industry-leading DSO was flat sequentially at 38 days, reflecting the high quality of our AR portfolio and the timing of invoices.

Deferred revenue at the end of the quarter was $680 million.

At the end of the year we had approximately 5,700 employees.

This was an expected increase on a year-over-year basis due primarily to our acquisition of Simplicity but generally flat with Q3 as we put a hiring freeze in place in the fourth quarter.

As Aart discussed, we just announced the signing of the definitive agreement to acquire the CHIPit assets of ProDesign to accelerate our efforts in the fast growing rapid prototyping market.

It is expected to be an all cash deal and financial terms were not disclosed.

We don't expect the material impact to our 2009 guidance.

Now let me address our first quarter and fiscal 2009 guidance, and then provide some additional comments on our expense assumption for the year.

For the first quarter of FY '09 our targets are, revenue between 332 and $340 million.

Total GAAP cost and expenses between 276 and 291.5 million, which includes approximately 13.8 million of share-based compensation expense.

Total non-GAAP cost and expenses between 253 and $263 million, down from 280 million in Q4.

Other income and expense between 0 and $3 million.

A non-GAAP tax rate of approximately 27%.

Outstanding shares between 145 and 150 million.

GAAP earnings of $0.26 to $0.31 per share, and non-GAAP earnings of $0.40 to $0.42 per share.

We expect greater than 90% of the quarters revenue to come from backlog.

Now for fiscal 2009, here are the key metrics, based on what we know now we expect revenue between 1.38 and $1.41 billion.

Other income and expense between 4 and $8 million, a non-GAAP tax rate of approximately 27%, outstanding shares between 145 and 150 million, GAAP earnings per share between $1.07 and $1.26, which includes the impact of approximately 58 million in share-based compensation expense, non-GAAP earnings per share of $1.60 to $1.72, and, again, cash flow from operations of approximately 200 to $220 million.

We have a unique window of opportunity in front of us, we are positioning the Company to take full advantage of it.

Even as we invest in technology development, and advancing our customer relationships, we will closely manage expenses to reach our margin targets.

In 2009, we are focused on several expense control initiatives.

We are planning to hold employee costs relatively flat including diligently managing our headcount levels and reviewing our contractor costs.

We are now in the implementation phase of reengineering our global quote to cash process with a goal of making the process faster and easier for both ourselves and our customers.

We are rolling out enhanced internal reporting and the analytic tools to better control and manage global expenses, such as travel and procurement and we are reducing our capital spending by another 15% in 2009, to approximately 30 to $35 million.

Now finally, to help you with your modeling, let me provide some additional 2009 commentary including our quarterly expense profile.

We expect total costs and expenses to increase generally in line with or slightly less than our targeted revenue growth.

We believe this is the appropriate expense level to take full advantage of this unique opportunity we have in front of us.

It also reflects the near-term revenue transition and integration of Simplicity.

We are expecting a typical quarterly expense profile throughout the year, with a modest sequentially increase in total expenses in both Q2 and Q3 and a traditionally higher Q4.

We expect our operating cash quarterly profile to be similar to last year with a net operating cash out flow during the first half of '09, due primarily to the timing of our annual incentive compensation payments.

While these assumptions are based on the current environment and our internal operating targets, our management team is fully prepared to react quickly on expenses should things materially change.

We will continue to be fiscally conservative and focus on responsible investing to enhance our leadership and emerge from these challenging times in a stronger competitive position.

While our near-term goal is to expand our competitive presence, while sustaining margins in this environment, we remain committed to longer-term operating margin targets of mid to high 20s.

In summary, we are very pleased with our fourth quarter and fiscal 2008 results.

While the economic environment is uncertain, we enter 2009 in excellent financial condition and look forward to another year of a solid business execution.

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

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question will come from the line of Rich Valera with Needham.

Please go ahead.

Thanks.

Good evening, gentlemen.

Brian, you talked about EBITDA expected to be flat in '09 versus '08.

Can you give us the EBITDA number for '08, do you have that convenient?

I do, let me look that up.

2008, that number came in at 364 million.

Great.

And looking at your expected share count for fiscal '09 it doesn't look like you plan to get particularly aggressive on a buyback, despite the fact that it would appear that buyback is quite accretive at current stock levels, is there anything that would make you get more aggressive on a share buyback or do you really want to keep that much dry powder around for other opportunities?

Yes.

That's a great question.

We are just constantly looking at the capital structure.

Even more so now with what cash we have on hand, where we hold it and obviously how it is invested.

So there's an awful lot of visibility going into how that cash is being managed.

I also outlined the amount of the cash that was both in the US and the amount of cash that was outside of the US, so, again that narrow it is the ability of using that cash in the US for things like stock repurchases and for some of the M&A investments we have locally too.

We constantly look at where we are going to spend that cash.

There's a lot of great opportunities in terms of the operating piece of it, we need to maintain the flexibility given the current credit markets we have got and again look for M&A opportunities to present themselves.

The buyback program is still very consistent in part of the structure as well, we have dollars remaining on the authorization and will continue to balance those opportunities as we move forward.

Brian, you mentioned you expected a book-to-bill slightly than 1 in fiscal '09, can you elaborate on that, how much of that is due to a renewal schedule, which maybe is a little lighter than fiscal '08 and how much of that is due to expectations of , maybe lower run rates on renewals due to the weaker macro

I would say it is almost all related to the renewal schedule.

As we look forward to the contracts that are up for renewal in 2009, it looks like a moderate decline in that book-to-bill ratio for the year so really on renewals.

I guess just to follow up on that, what has been your experience you have, an October closed your quarter, it was a very challenging period to be doing business what was your experience, are you successfully maintaining run rates at this point, are you seeing push back on customers trying to actively reduce run rates if you can give any color that would be helpful.

I can comment on that.

This is Aart.

In October, we actually continued to grow our run rates and I think that's a good sign because that means that the people investing are investing for the longer-term.

One of the other aspects of the renewals is I wouldn't be surprised if people become a little bit more cautious about long-term renewals just because they look at the uncertainty around us, around in the world, and are just cautious in making commitments.

And so I am glad you bring up the run rate.

That's clearly what we are paying a lot of attention to and that is a key health indicator for our business going forward.

So far so good in our business.

And how do you think that will manifest itself, your duration, average duration will actually go below three?

Will people want shorter commitments like one and two year, as opposed to the average three year deals.

The honest answer is I don't know, I just think that with this amount of change around us there will be changes, and so, one, it is sort of could go either way actually.

You can go the direction where people say, hey, I don't want to make long-term commitments, I don't know what is coming towards me.

That would say shorter duration.

You can also see no, no I want to make bigger commitments from a preferred partner point of view, let's go longer duration, and so because none of us have faced the economic situation we have around us, we are trying to execute very thoroughly while leading ourself fairly high degree of flexibility in how, how we get there, but paying great deal of attention to the very basics of what is good business.

And ultimately, we would like to, to see this as an opportunity for Synopsys to strengthen its position with the customers that matter most.

Okay.

Thank you, and good luck if '09.

Thank you.

Our next question will come from the line of Raj Seth with Cowen and Company.

Please go ahead.

Hi.

Thanks.

Just a follow up to the previous question can you talk a little bit more about what changes you have actually seen over the last two months in your customer base, maybe a little color on how some of the conversations you are having with key semiconductor executives, how those are going, what is the tone of those conversations at this point?

Well, if there is, the if there is one uniform, almost the same words coming out of the vast majority of the customer, it is this term of no visibility.

And the they immediately characterize, it doesn't mean not a substantial portion of the business comings in, it is just not clear when and exactly how.

And that brings about a fairly high degree of caution.

The second aspect is that clearly people look around at the economy and all come to the same conclusion which is okay cost management is absolutely central, and, and there are two of three ways to look at that.

The first way is obviously do not do project that is go nowhere anyway, and in normal times it is always difficult to cut these things and stress times people find a way to do that and reinvest the effort in those projects more promising and the second thing is look at everyone of your processes including, of course, the design process and see how you can streamline it more and that is where moving more toward integrated design flows, fewer vendors, looking at which IP internally versus externally, all of these are on the table.

As you well know for many years we have essentially prepared the Company for that general direction, and I think that moment is upon us.

And do you see, I mean a normalized environment people even when business gets slow are don't tend to cut R&D projects, key, product development projects, in 2001 and 2002 and at the downturn they did.

Are you beginning to see that in your customer base or has that not started yet?

Not massively so.

I think rather than cutting project it is almost more like people are looking at their entire business unit structure and say I have five business units, why don't I sale this one to somebody who has, who is in the same segment and can do better, but, in other words, you get what I would call segment consolidation long before you get projects cutting.

Now underneath, I think there's no question that people are, are looking at every aspect of their business and partially because of the economic stress, it gives management, internally to mandate do something and therefore they're actually moving more rapidly than they would normally.

So I think over time we will get there.

We have not seen any slowdown in the, in the most advanced chips and I wouldn't expect to see a big slowdown.

We have seen that a number of customers are hanging around longer at the older nodes, and I think I have shared that trend with you now for at least 18 months or so which does not mean that it is less sophisticated design, it just means that people are squeezing even more out of the older more amortization nodes for cost reasons.

So the word cost is pretty much central to the vocabulary of all top executes.

If I might just a couple more.

You mentioned share and have a couple of time it is the last couple l of quarters your view that you are taking some share and some of the bigger deals you have done.

Any sense for how much share you have gained over the last year or any projection about how much share you think you might be able to gain over the next year given the, the chaos in among some of your competitors?

Well, again, the term share has been misused many times in of the EDA earnings release.

At the end of the day it is sustainable revenue that givers you share.

We are growing our revenue and I think one of the key reasons we are able to do that is because a number of customers are making prolonged commitments with us and because of the, I believe quite conservative revenue recognition, model that we have, I think the revenue you see is really where we are as a company.

And so, I think the opportunity space is clearly impacted by the overall economic down pressure.

On the other hand it is precisely because of that that customers are going to move faster in some of their efficient pushes and I do think that we are well positioned to help them with that and that will have positive impact on our growth potential.

I promise, last question, you mentioned TAM expansion as an objective and talked about maybe a little careful in terms of use of cash for strictly buybacks, et cetera.

When you think about where you want to take the footprint of Synopsys from a TAM perspective, where are the areas you want to expand over the 12 to 18 months?

First, two comments, I want to make sure people understand we are not adverse to buying back our own stock, we are just very cognizant and that we are in a time period where cash is King again.

And so we like the cash position that we have.

We clearly see that one could potentially expand in the adjacency that we have already have a footprint in and a couple that stand out is clearly how we can invest internally or otherwise in what we do on the IP and the rapid prototyping and in the-- moving towards the system side.

But I wouldn't discount, also the fact that, some of our core anchor tools are becoming stronger and therefore, more competitive as we approach customers to focus more on Synopsys as the primary target.

All right.

Thanks for all of that.

You're welcome.

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

A.

Davidson & Co.

Please go ahead.

Hi.

Good afternoon.

Aart, when you guys provided initial guidance last year or not last year, last quarter, I think one of the things you suggested is that you didn't want to set the bar too high because you saw that your competitors would likely be facing a tough environment and would be perhaps willing to do some potentially unnatural things on the pricing side.

At least judging by their equity valuations their situations haven't improved.

How is the pricing environment right now and how do you maintain appropriate pricing in an environment like this?

Well, I'm a little bit old school that you don't want to move a lot on pricing because pricing tends to never come back.

And so far we have done okay with that.

I think the pricing is actually interestingly enough I think a lesser consideration than the decision to invest with vendor that is are stable and going to be there for the long run.

And so, lets not forget that many companies right now are looking around and saying how can I de-risk my future while driving my total efficiency.

So that is actually I think the bigger consideration for many of our customers and I do think that as other competitors have moved more to ratable business models, there's a natural better ability of industry to be more careful with pricing practices anyway.

Okay.

And then, just looking at the revenue mix, the up front portion of your business is up nicely year-over-year, almost 28%, an environment that I would think would be challenging to get up front deals done.

Is that mostly Simplicity business and remind us of the mix of, through Simplicity how much the hardware business should be as a portion of that total business?

Sure.

Our model just to clarify that again is to would have less than 10% of our revenues coming from up front transactions and by far the majority more than 90% coming from transactions done on a time-based environment.

So, that is still the tenant of our underlying business model through the last several years and of course going into '09 and '10.

So we are aiming to keep that below 10.

So you have the consistent and you predictability around the top line in the business side.

So relative to the achievement in the quarter, we are, again, well within that less than 10% range for both Q4 and the total year and it does include now the addition of the hardware piece of Simplicity.

In overall, we are not really breaking out the details of Simplicity in that level but if you recall we had talked about the range of 21 to 23 million of revenue coming from Simplicity in 2008 and our numbers and they delivered against that model.

So that is a little bit more break out of the revenue line.

Okay.

And then, just to follow up on that, art, one of the things that Simplicity was really hoping to launch this year was really some tools that helped people not just get prototypes on to these FPGA boards but help sink those boards up to simulators, like you have provided.

Is that offering now up and running and are you perhaps gaining share relative to emulator as a result or at least increasing the market addressable market?

It is a good question because there's no, no question that the whole verification side of the design flow is becoming much, much larger.

That is accent by the way that the fact that there's embedded software that goes with the chips.

So in the context, the rapid prototyping to emulation space is one we are highly interested in and of course the challenge with emulator, notwithstanding that for some applications they are great is that they're very, very expensive and bulky machines that are not particularly flexible for many applications.

We are creating more environment and this is a multistage effort because there's no connecting downwards to the RTL simulation but also upwards to the virtual prototyping, which is essentially the software version of rapid prototyping.

And then, in addition, we added yet another tenant with the CHIPit acquisition which adds some more capabilities that allow us to play in some of the end applications that are software rich and we have results with some realtime capabilities.

So, we have, at this point in time, a very good portfolio, and the pieces we will continue through multi year both evolution and integration, but it is an area that we are bullish and positive about?

The final question there wasn't a tremendous amount of growth.

The growth is now slowing, in manufacturing related revenues, DFM related revenues, if you will.

Is that mostly due to lower CATS business this year as the overall capital equipment markets in decline and how do you see DFM offerings expanding the next couple of years?

In general, the results in a market that is highly played by very few customers, fluctuates quite a bit from quarter-to-quarter and year-to-year.

The offering is doing well.

What we are going to see is that the manufacturing guys are under as much cost pressure as anybody because they get immediately hedged by anything that touches volume.

And so my guess is that will be an area that we will be fairly careful in spending in the near-term.

Having said that though, it is a very good anchor point for many of our other tools and we debate continually, if we should split this out or not, in our accounting.

But being all the way down into [T CAT], which is almost at the atomic level all the way up to the place in route is good position for us.

I think you are just going to see some fluctuations.

Okay.

Thank you.

You're welcome.

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

Please go ahead.

Got it.

Thanks.

Good afternoon.

Aart how would you compare the current environment to what we saw back in '01 and '02?

I suppose in one respected lease it is very much the same with EDA almost certain to decline as an industry this year, as it did in '02 but what other differences or similarities might there be between this environment and that last EDA recession?

Well, I think one has to move to the big picture, immediately, which is there's a reason people are talking about a global recession because it is touching every aspect of the modern economy.

When discussing with the semiconductor guys, they will say there's some big differences in '01 we had way too much inventory.

There was oversupply, and at this point in time, the semiconductor people think they we are a victim here, this had nothing to do with our industry.

Now having said that, victim or not, you are part of it and so the pressure is coming from a much more global perspective.

Zooming in to your question, what's the impact all the way to our industry.

Well, on one hand we are obviously subject to the same cost pressures of all of our customers wanting to save money.

On the other hand we are the core or the very thing that differentiates and keeps them alive.

Secondly, in the last few years many customers have essentially greatly decreased their R&D spending on the manufacturing side thus freeing up some of that money to go toward design.

Design has become more complex.

The combination of those things leads them to think about design not as a whole set of point but more and more as a process that needs to be and managed for efficiency and productivity and predictability.

Those are exactly the angles we have taken for a while and they're starting to resonate as they did in the past because pressure always makes you look at what's essential.

Would it be fair to say at the technology level one difference between now and then is that back in '01, '02, there was really only one important upgrade going on at the time, fiscal synthesis, where today there might be perhaps multiple technology upgrades than necessarily need to occur?

I would almost go the opposite direction, which is, a lot of focus at that time was on product upgrades and so on.

Nobody is talking to us about products today.

It is all about, what is the overall solution, how do we manage productivity, what with you do to help me bring my cost down, and so the do log in times of economic pressure moves up and it moves to the executive who may not understand exactly EDA.

I know it is important but help me understand why and where and how much should I spend on this.

And it all goes back to cost equations.

And so that doesn't mean that they're not fabulous technical advances and we where proud of quite a number of the new products and new capabilities that we have.

It is just that I think we, we have moved to more of an economic dialogue than just the technology dialogue.

Now that doesn't mean that you can bypass technology.

I think technology has to be not only good enough, it has to have legs going forward and a vision of where it is heading but the economic part is only a key in the dialogue.

Brian, with respect to the book-to-bill comment for '09, you alluded to its being largely a function of the renewals calendar.

When we look back at progression of '06 bookings, the worst quarter clearly was Q1, pretty low bookings number, the rest of the quarters of '06 three years ago assuming you adhere to the three year durations, were not that bad second, third and fourth quarters of '06, did reasonably well, particularly Q4.

So, wold you say that the issue for '09 is largely a weak renewals calendar in Q1 or at least the first half and perhaps the rest of the year starts looking more normal?

Yes, I would say on a quarterly renewal basis, it is really not the most critical metric of when deals renew, if it is on time, if they renew a quarter in advance of that relative to the financial performance of the Company.

That being said we do profile as we laid out some of the discussions around Q1 revenues, around the expense profile throughout the year but it is a pretty consistent of when the deals are up for renewal, they get negotiated anywhere between three months to a year in advance of those renewal dates to try to identify the new capabilities, number of seats, the new product offerings, and, again, we have to be pretty flexibility as we work through these opportunities in front of us.

Aart, with respect the analog product, the Custom Designer, you have the second version and GA coming in the spring.

Do you think that could trigger over the remainder of '09 after it goes to general release perhaps a few 10s of millions of dollars of incrementally booking from that product line?

We never talk about the specific bookings for a specific product.

Let me remind you that one of the key things why we wanted to have a good position in custom designing is because we wanted to have a complete solution.

That was the strategic objective that we wanted to meet and I think subject to continued improvement we have just made fantastic strides in that.

Secondly, having said that, I think the products is actually looking quite good and I already started to communicate to you I think in the spring that we saw that the quality of the product was very high, in other words, very few bug issues and so on.

What we know now is that the adoption is actually better that what I would have suspected, and so those are all good signs.

Now you have to put that under the, the umbrella of the overall landscape of change.

So we will absolutely drive a business for Custom Designer because there's an opportunity there, there are a number of customers that would like to work with alternative to what's been on the market that are looking for the new futures at the same time as said earlier I think most of the dialogue with customers is overall solutions and this is just great timing for us to have filled this gap.

Our next question will come from the line of Tim Fox with Deutsche Bank.

First question, just going back to the book-to-bill one more time, if I might.

The lower outlook for revenue now for '09, you obviously knew what the renewal calendar was last quarter, heading '09 and you are talking about maintaining run rates and additionally picking up some market share, so I am just wondering how to fill in the blank of why the lower outlook for '09.

There's no blank to fill, meaning that I think there's a little bit of a misconception on the word renewal.

Many people think you do a three year deal and therefore all of these things renew constantly in sort of a three year cycle.

That's actually not the case.

Our field people continually interact with the customer, many of the renewals are earlier and they're not really a renewal, you sale them additional things, you sale them more things.

So our objective is to continually grow the run rate with the customer, renewal or no renewal as a matter of fact.

Secondly, I think that we do try to look at roughly how many and which ones are the deals most likely to come about.

And as we looked at the, the weather forecast on the outside, you can only do one thing, which is be as conservative as you can possibly be and there is no point whatsoever in renewing with customers that have one objective, which is get too a much, much lower cost point unless you can grab significantly more market share.

And so the way we are looking at this is a combination of conservative but stay very much on the ball of focusing on the run rates and precisely because we have a very, very good backlog for '09 and already substantial backlog for '10 and '11, this allows us to sort of weather the storm and be judicious at how we work the, the new opportunities.

Okay.

That's helpful.

And Brian, going back to the cash flow, and just looking at the guidance, your GAAP net income looks like it is down 13% or so but cash flow guidance is down about 60%.

Can you help with the puts and takes you have talked about and guide us through the major changes that really drive that 60% drop in cash flow.

Are you looking at my major diversions in D&A or stock-based comp or is it more deferred revenue change, try to help us understand the puts and takes that would be helpful.

You bet.

No cash is so critical, watching each of the inflows and outflows and it is a god metric.

As we look at the year in front of us here, we see both, we are going to have slightly less collections than we had seen in 2008, and that we are going to see some increased disbursements so at a high level that's really what cash is all about.

When we looked at the collections side of the equation, we over achieved our cash collection target actually by about $25 million in our fourth quarter, as you can see we came in very, very strong in cash for the entire year, and just believe it is better and better to have the cash in our pockets if you like given the environment we are in.

So from a swing perspective of what happens from '08 going to '09, that is contributes about 50 million, kind of on both sides of the equation.

That's $25 million of being overly achieving the targets we had set out for ourselves in the fourth quarter, another thing is we are just, again, being conservative in the cash collection environment, given how critical cash is to everybody.

We want to be conservative to the payments already lined up but, again, anticipating with terms of new business activity and other things that there may be a slowdown or we aren't seeing the detail yet but as far as forecasting a full year in advance, just thought it is prudent to include that, and then, again, the last element on the collections side is that moderate book-to-bill reduction that we are seeing and that is going to contribute as well.

On the other hand, the disbursements; right.

So while we are holding the operating margins at about 23% for the year, we are committing to higher revenues between 3 and 5.5% , but at the same time expenses will go up reflecting the full year Simplicity.

Disbursements being higher, the collection side being down slightly contribute to that 200 to 220 million of positive operating cash flow, very strong number

Great.

And the CapEx for '09 in the sense what that might be at this point?

Yes.

We are forecasting between 30 and $35 million of cash which is a further reduction of 15% from the year's level which we already reduced the '08 numbers by 13% from the '07 levels.

So again this cash is so critical.

We have done a fair job on taking up the cash during '08 and look toward to conserving that again, in '07 from expense management perspective, watch on the CapEx side and use that cash for the appropriate investment side as we go forward.

We have four minutes left of the conference.

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

Please go ahead.

With the book-to-bill commentary that you made can you give us some idea the magnitude of the change in bookings you expect in '09, you expect to be up, flat, down, down double-digits, just a sense based on the book-to-bill comment.

Normally we don't comment on bookings at all as you know.

What we give out is at the end what our backlog looks like for the coming year.

Again I don't want to get the feeling here to overstate this discussion point because the correlation between the and the run rate is not a simple one at all.

As a matter of fact, there are many situations lower bookings maintains a better run rate and that is the objective to hold on to.

There's a lot of uncertainty right now, in terms of what customers want to do.

In many situations we are best off if they don't do anything as a matter of fact.

Now having said that, our objective will, is to continue to grow the run rate for the year.

And so we will see how the economy holds up with that, but our business outlook notwithstanding, the landscape around us is actually quite bullish.

We think we are in as strong of a position as we have been in many years given the youthily of our tools opportunity competitive that we have and strength of the technology.

And so what you hear is essentially work against a plan that is built for conservatism.

And you see us manage the balance sheet in exactly the same fashion because nobody we talk to can really predict what is happening in the beginning or the mid or the end of next year.

And so, I think we are reasonably well braced for many scenarios and if things turn up that is great, just nobody know that is will happen.

Therefore we are well prepared with the overall plan we have put in place.

Okay.

And then Brian, can you give a sense, you have given us the guidance and revenue growth but what would that be on an organic basis.

Well, those numbers are all inclusive of course, reflecting both the impact of the, primarily Simplicity acquisition but breaking out just organic growth, the Company over its history has acquired many companies and continue to grow.

We really don't split them out.

We are being conservative in both organic.

It does not include any additional M&A opportunities, it is really a forecast of where we see the Company growing as we move forward.

So 3.2 to over 5.5% is our combined overall revenue growth rate for 2009.

All right.

Last question, Aart, there has been a couple of questions about the last time around that, in terms of slowdown, one thing last time around was the, the concern about shelfware and what happened with R&D head count and reductions, can you give us only commentary in terms of what you are seeing from your standpoint, from your customers on the head count side and maybe what you might manage or do differently this time around to minimize the shelfware issue?

Clarify what you mean, you mean with shelfware issue?

Sure, if you have 100 engineers at a customer and they fire ten of them and you have 100 licenses there, they're not going to come back and buy more licenses until they get above 100.

Sure.

No I understand.

Thank you.

Well, first in terms of people, so far we have not seen major reductions in work force in the engineering side of things.

And frankly, I think that the first reductions are going to be much more on the, the production and manufacturing side because those are the thing that is are really impacted by volume.

And it tends to be toward the end of any issue that people start to cut into R&D.

Now having said that, I think there's no question that people will look at which projects have a future and will mostly try to sale off the assets that, that don't any longer fit their strategy.

So I think we are going to see a number of businesses essentially trading hands more than anything and the engineers go with that and then it is a matter of working out the fine points of what happens to the software as they move owner.

On the shelfware issue, I think that sort of secondary to my, to the first point, meaning that I don't think there's much shelfware software right now.

Remember that in '01 we came out of the crazy 1999 and 2000, where if you just had clicks that was viewed as revenue and that permeated the entire industry.

So people were growing so much they were just buying on the future.

I think that is long gone.

As a matter of fact, if there's thing that CFOs have changed after '01 is that they're not buying ahead of need very much.

Lastly, I think that for many of the, the more modern chips the utilization of software has gone up or grown I should say and so from that perspective, it is more a matter of negotiation of how much do you get for the budget that you have available than anything.

And our objective should be to have that discussion with customers because that brings us administrate straight back to productivity to help simplify their flows and become a more important supplier to them rather than having debates on numbers of copy.

Okay.

Thank you.

You're welcome.

Our next question will come from the line of Terence Whalen with Citigroup.

Please go ahead.

Thanks.

I appreciate your fitting me in.

This is just a real simple one on operating margin.

Brian I believe you I don't said with the revenue growth of 3.2 to 5.5% in fiscal '09, you would expect expenses to be in line or undergrow that slightly.

Would that mean that operating margin would be flat to up or I thought you had mentioned maybe operating margin would be down slightly.

If you could just reconcile those and that's it for me.

You bet.

We are really looking overall at about a flat margin story.

Had a very healthy 23% level for this year.

So we are working around that based on the scenarios for both revenue and expenses but it is a roughly flat number.

So maintaining the profitability level that is we have achieved due to both get the additional revenue and to be able to invest in those opportunities are right in front of us to be able to grow for the future here.

Okay.

Great.

Thank you.

You're welcome.

And our last question will come from the line of Casey Raj [Kumar] with RBC Capital Markets.

Please go ahead.

Hi, guys.

If I can squeeze in one question.

Can you guys talk to any specific initiatives you guys have undertaken, especially with the marketing folks to gain customer share, not market share but customer share at the expense of your main competition?

Certainly.

We have quite a number of very active discussions with customers about the notion of productivity and predictability.

Productivity and how month do you get as much out as possible for the dollars you spend.

I am not talking just about EDA out-of-pocket costs but overall design costs and that is really the key to go on because if we can look at that picture, there's way, there are ways we can save our customers money while Synopsys is growing.

Secondly, on predictability, which is the time dimension, is that with more and more of the, of the complex chips, people are finding that they have a hard time knowing exactly when the project finish because they're design methodologies are all over the map and need to become more structured and standardized and disciplines.

That of course ties directly to the first topic, which is how can you, how can you work with fewer vendors to get a better solution.

And so those dialogues are very, very active right now.

And I think that we will see that economic pressure will actually help customers make moves that otherwise internal are hard to do because change management is hard because when it becomes economically harder, top down management can actually have more impact and I think we are already starting to see the beginnings of that.

Expect the launch of the Custom Designer to help you gain customer share next year, what is that story.

No I think it is a fiscal '09 story and it is obviously gaining share from virtually zero and specifically the Customs Design area.

Customers already have done tape outs with our tools today which is very encouraging.

At the same time, it is also in the much bigger picture which is by virtue of having a more complete solution, we become much more attractive to customers that have a need of selecting fewer tortoise be economically more viable and we have a check mark in that category as well.

Okay.

Any quick thoughts on what this going to be the revenue the following fiscal '09 beyond the first quarter?

I think we gave earlier guidance, maybe we can take this up in the, in the Q&A session the individual Q&A interactions but there is guidance for '09 revenue in the documents I spent out, I believe.

So if we can refer you to those there's more detail there.

And lastly, do you guys expect the pace of 32-nanometer tools to become next year?

I think it has already picked up because the 32-nanometer chips are already in design, the technologies are being honed for roll out in 2009 and as a matter of fact, I am looking at my sheet here that we are tracking 32 active designs and a bunch of people are gearing up for making the technology available commercially in the second half of '09 involvement the technology train has not decelerated at all.

Yes, finally, from a would you have any quick thoughts on, I think you have just this is earlier but on the wanted to point to specific risks that you can anticipate into next year beyond the usual macro stuff, regarding what could they be.

It is sort is of obvious the macro economic picture is one of, of uncertainty that pretty much all of us have never seen so far.

Now having said that, both the high-tech field is impacted but is also crucial within that semiconductor field is impacted and more crucial the line of reasoning applies to us as well.

And so, from that perspective, I think continued investment in high-tech will absolutely be a necessity now the fact is that when everybody is looking for money the negotiations are going be harder than before, people will believe they need more technology for less money.

We shall be prepared and we should not be callus about that.

Many of our customers will hurt and we need to be able to be a really good partner in that but at the same time we provide the very value to allow them to differentiate, survive and do well.

So I think we are crucial for that picture.

Lastly, I expect that in the United States, with the new administration we will be additional emphasis on high-tech.

I think that supports all of the arguments I just made that the semiconductor industry will continue to be very important in the years to come.

With that I think it is time to close this earnings release.

We appreciate the time that you spent with us, as usual, Brian, Lisa and myself are available for additional comments and questions right after this.

Thank you for all of the support in '08.

We look forward to your support in '09.

It is going be in many ways a very interesting, challenging but also high opportunity year for us, and so we appreciate the time you spent with us at this earnings call.

Good-bye.

Ladies and gentlemen, this conference will be available for replay after 4:00 p.m.

today through Wednesday December 17, at Midnight.

You may access the AT&T Teleconference Replay system at any time by dialing 1-800-475-6701 and entering the access code of 968632.

International participants may dial 320-365-3844.

Those numbers again are 1-800-475-6701 and 320-365-3844 and enter the access code 968632.

That does conclude our conference for today.

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

You may new disconnect.