新思科技 (SNPS) 2009 Q2 法說會逐字稿

Thank you for standing by, and welcome to Synopsys, Inc.'s earnings conference call for the second quarter of fiscal year 2009.

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

Later we will conduct a question-and-answer session.

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, Pamela.

Good afternoon everyone.

With us today are Aart de Geus, Chairman and CEO 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 results are described in our 10-Q for the fiscal quarter ended January 31, 2009, and in our earnings release for the second quarter fiscal year 2009, issued earlier today.

In addition, all financial information to be discussed on this 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 second quarter earnings release and financial supplement.

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

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

Good afternoon.

I am pleased to report another quarter of very good execution, with solid financial results, strong technology momentum, and visible customer successes.

Let me begin with our financials.

In Q2 we delivered $337 million in revenue, and non-GAAP EPS of $0.45 above our target range.

We achieved this within our predictable business model with more than 90% time based revenue.

In anticipation of continued economic stress, we further tightened our expense management to stay solidly on track with earnings for the year.

We exited the quarter with $877 million of cash, and no debt.

Turning to the overall environment, the outlook remains mixed.

While rebounding off the bottom with inventory rebuilds and some rush orders, the semiconductor industry is expected to experience a 2009 revenue decline in the 20% range.

After that, a very gradual recovery lasting into 2011 is a likely scenario, although predictions will be greatly impacted by the overall economy.

The long-term ramifications of this scenario are only starting to become visible.

In addition to some immediate cost cutting to respond to the crisis, most businesses are now refocusing their market strategy, massively streamlining their operations, derisking their supply and partner relationships, and in a number of cases, actively pursuing consolidation opportunities to drive economic efficiency.

The recently announced potential Renesas/NEC merger is a visible case in point.

Over the next 12 to 24 months the challenge for the semiconductor industry and its suppliers, will be to find the next level of efficiency in an overall very weak economy.

The good news is that across a broad field of applications, semiconductors are a key enabler to future prosperity.

Drivers range from an extensive green push to the emergence of low cost netbooks and solid state drives, to advances in connectivity including telepresence, to exciting products such as Evolving Kindle that may completely restructure the publishing industry.

Meanwhile, our customers are under high stress, and we are moderating our revenue expectations as we approach 2010.

In Q2 we saw average run rates slightly decrease, due in part to several bankruptcies during the first half.

And we expect the end of the year run rates to be slightly down.

As anticipated, many customers are renewing their contracts closer to the expiration dates, and we expect bookings for the year to be slightly below our original internal plan.

Finally, we continue to see late payments for some customers who are focused on short-term cash conservation.

In a recession of this magnitude none of these things should be a surprise, and we have already adopted a number of measures to further strengthen our position.

I am happy to report that while we are slightly reducing the revenue rates for the year, we are actually solidifying our earnings per share guidance for '09.

We are also moderating our operating cash flow target to reflect the collection environment.

Brian will discuss guidance in more detail.

Given the extraordinary economic situation, Synopsys is actually doing very, very well.

Our technology position is demonstrably strong.

Our customer relationships were built for the long term, and have an intense focus on execution so that we emerge even stronger.

Synopsys is steadily gaining customer momentum, while continuing to invest in evolving our product portfolio.

As customers are aggressively derisking their supply and relationships and focusing on cost efficiencies, many have selected Synopsys as their primary EDA partner.

Evidence of this, is the further expansion of our relationships with companies, such as Marvell, Toshiba, Tundra, and Wolfson.

The number of companies who have openly selected Synopsys, is further augmented by several sizable partnerships that have not been publicly identified.

The stability and shared visions created in these kinds of deep relationships between vendors and customers will be critical in driving the innovation and technology road maps of the future.

Let me now turn to the essence of our DNA technology.

The need for advanced design goes on unabated.

Both the direction and level of our technical investments, match well the needs of our customers, and we feel a great sense of momentum in the Company.

Our strategy is twofold.

First, to ensure best-in-class point technology and products.

While we can't promise the best in every tool, we always try to do so.

Second, and even more important, is driving best-in-class overall results, through integrated, advanced flows platforms and methodologies that focus on our customers total cost of design.

2008 was a prolific year for Synopsys.

We introduced significant new products, such as Zroute, recipient of this year's EDN Innovation Award for Design, and Custom Designer, our long awaited entry into analog implementation.

2009 is continuing the steady delivery of new products and capabilities, ranging from systems to silicon.

In verification, the #1 pay point for customers, we are building on our strength in both analog and digital with several advances in Q2, including Custom Sim for unified analog simulation, which combines the speed and accuracy of what used to be three separate tools, into a single flexible easy to deploy solution.

We also delivered Multicore Technology in VCS Functional Simulator, resulting in a 2X speed up.

In implementation, we introduced an exciting new physical verification solution that integrates manufacturing information and analysis into the design process.

A companion to IC Compiler, IC Validator is architected for 45-nanometer and below designs, and includes advanced features, such as a brand-new engine driving greater performance, unmatched scalability with multicore CPUs, and an architecture permitting easy design corrections within IC Compiler.

IC Validator has already been adopted by companies such as technology heavyweights, NVIDIA and Toshiba.

Our implementation flow is excelling at the most advanced 32 and 28-nanometer designs, and our work with customers at these nodes is proceeding very well with the broad objective of increasing design productivity and predictability.

At our Users Group in March, we launched our new open design system, Lynx.

Lynx is architected for easy adoption by both mainstream and advanced users.

And it is aimed at systemizing design for efficiency, through a lower risk, foundry ready path from design to silicon.

With production proven design flows and methodologies for 65 nanometers and below, Lynx enables out of the box functionality without costly cap infrastructure spending, helping our customers reduce their total cost of design.

Not surprisingly, we have already had several adoptions of Lynx even at this early stage.

As a side note, our San Jose Users Group was best attended in Synopsis history, attesting to the high level of interest in what we have to offer.

Turning to our strategic investments.

I would like to highlight two today, Custom Design and IP.

Our new analog mixed signal design solution, Custom Designer, is generating a lot of interest, and is on track for general availability next month.

Customers have been impressed, not only with the viable alternative to the incumbent, but also by the functional and ease of use features in Custom Designers that surpass other offerings.

In the IP space, the recession is accelerating the build versus buy decision that many customers go through as they streamline their operations for efficiency and differentiation.

Purchasing commercial high quality IP is a good way to save on development costs, and to focus one's own designers on the most critical and differentiating portions of a design.

During the quarter, we expanded our offering with the acquisition of the Analog Business Group of MIPS Technology.

This acquisition adds a new analog IP product line, including data converters, audio codecs, and video front ends, and complements our portfolio of interfaced IP with HDMI products.

To conclude, even with the turbulent environment around us, Synopsys again executed well in Q2.

We have technology momentum, and are seeing significant commitments by key customers to work with us going forward.

We are proactively balancing technical investments and careful expense controls.

Overall we expect to weather the recession well.

We are clearly building for the opportunities waiting in the recovery.

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

Thank you Aart.

Good afternoon, everyone.

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

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

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

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

As Aart discussed, we are continuing to manage the business well, in what is a difficult economic environment.

We delivered solid second quarter results highlighted by top and bottom line growth, strong operating margin, and we exited the quarter in a healthy financial position with $877 million in cash, and no debt.

Total revenue increased 4% to $336.8 million, within our target range, with greater than 90% of Q2 revenue coming from beginning of quarter backlog.

While our software results remain solid, the slow economy has understandably affected both our consulting and hardware businesses, as customers continue to focus on reducing costs.

This has resulted in some pressure on our consulting engagements, and some delays in hardware purchases during the quarter.

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

Now turning to expenses, total GAAP costs and expenses were $282.2 million, which included $10.6 million of amortization of intangible assets, and $14.7 million of share base compensation.

Total non-GAAP costs and expenses were $253.1 million, and expected year-over-year increase, due mainly to our Synplicity acquisition, but below our target range due to company-wide cost controls, and timing of quarterly expenses.

For all of 2009, we expect total costs and expenses to increase slightly less than our targeted revenue growth rate.

As we prepared for an uncertain economic outlook for the balance of 2009 and 2010, we implemented broad cost savings initiatives, focusing on vendor and contractor costs, compensation and head count related expenses, capital expenditures, and discretionary spend, including travel and marketing events.

These actions will increase our flexibility to more efficiently manage our expenses to our moderating revenue expectations in this difficult environment.

Note also, however, that while we are managing costs diligently, we intend to fully fund our strategic growth areas, drive product innovation, and expand our technology leadership, to emerge from these challenging times as an even more successful company.

Continuing on with our key operating metrics, non-GAAP operating margin was 24.8% during the quarter, and 25.7% for the first half of fiscal 2009.

While the timing depends on how the environment improves, we remain committed to our longer term operating margin target of mid- to high-20s.

By proactively aligning expenses with revenue, we were able to deliver Q2 earnings above the target ranges we provided at the outset of the quarter.

GAAP earnings per share was $0.33, while non-GAAP earnings per share was $0.45.

Earnings outperformance was driven primarily by top line growth and expense management, along with higher than expected other income.

Our non-GAAP tax rate was 27.1% for the quarter.

For modeling purposes we think that a 27% non-GAAP tax rate is a reasonable estimate for the full year.

Our revenue visibility remains strong, with 95% coming from backlog.

Up front revenue was 5% of total, well within our target range of less than 10%.

The average length of our renewable customer license commitments for the quarter was about 3.4 years.

Now as you know, from our previous disclosures we have been involved in a tax dispute with the IRS regarding 2002 to 2004 tax returns, primarily associated with issues related to our acquisition of Avanti.

We are pleased to report that during the quarter we reached a tentative settlement with the IRS examination division that would resolve this dispute.

The settlement is subject to further approval by the government, which we expect will take at least several more months.

But as of today, we believe a settlement is likely.

If approved, we would expect a settlement to result in cash payments of approximately $50 million over the next 12 months.

This will be fully offset by a reduction in tax payments in future years.

We also expect that the settlement would finally permit certain tax refund claims of around $35 million from other years to be paid to the Company in 2010.

We reiterate that if the settlement becomes final, we are adequately reserved for these items, so no material P&L impact.

The tentative settlement is not included in our 2009 operating cash flow forecast.

Now turning to our cash and balance sheet items.

In the current environment, cash continues to be an area of focus for us and our strong balance sheet provides with significant financial flexibility.

We ended the quarter with 877 million in cash and short term investments, and no debt, an amount that translates to approximately $6 per share in cash.

Of this balance, 52% is held within the United States.

Operating cash flow was $24.7 million in Q2.

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

However, at this time we feel it is prudent to slightly moderate our FY09 operating cash flow target, to approximately 170 million to $190 million, due primarily to less than planned scheduled collections for the balance of '09.

This slightly lower level is driven primarily by three factors.

First, continued late payments from some of our customers.

Second, bookings coming in slightly below expectations for the year, and the timing of these bookings.

And third, we are being conservative in our cash collection assumptions, given the uncertain economic environment.

Now continuing on with our cash and balance sheet items.

Capital expenditures were $6.5 million in the quarter.

For the full year, we expect to reduce capital spending by 15% over last year to approximately 30 million to $35 million.

We did not repurchase stock in the quarter, and have approximately $210 million remaining on our current authorization.

As always we will evaluate the best use of cash each quarter including company operations, investments, and stock repurchases.

At this time, we value the flexibility that our cash provides.

Now as Aart highlighted, we are excited to have closed the acquisition of the Analog Business Group of MIPS Technologies earlier this month.

It was an all cash deal for approximately $22 million, funded from our US cash balance.

We expect the transaction to be approximately $0.04 dilutive to non-GAAP earnings in fiscal 2009, but we will absorb that dilution, and are even increasing the bottom end of our EPS guidance.

We currently expect the acquisition to be neutral to slightly accretive in fiscal 2010.

Q2 net Accounts Receivables totaled $189.1 million and DSOs were 51 days, slightly up from last year and well within our target range.

Deferred revenue at the end of the quarter was $588.5 million.

We ended Q2 with approximately 5,700 employees.

This was an expected year-over-year increase due primarily to our Synplicity acquisition, and basically flat head count to the first quarter.

Now moving on to our guidance.

For the third quarter of FY09 our targets are revenue between 342 million and $350 million.

Total GAAP costs and expenses between $284.5 million and $300 million, which includes approximately $14 million of share based compensation expense.

Total non-GAAP costs and expenses between $261 million and $271 million.

Other income expense between zero and $3 million.

A non-GAAP tax rate of approximately 27%.

Outstanding shares between 144 million and 149 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 quarter's revenue to come from backlog.

Now our fiscal 2009 outlook.

Based on what we know now, we expect revenue of approximately 1.35 billion to $1.38 billion.

Other income and expense between $14 million and $18 million.

Non-GAAP tax rate of approximately 27%.

Outstanding shares between 144 million and $149 million.

GAAP earnings per share $1.11 and $1.26, which includes the impact of approximately $58 million in share based compensation expense.

Non-GAAP earnings per share of $1.62 to $1.72.

We have increased the low end of our guidance range by $0.02, despite the slight dilution from our acquisition of the Analog Business Group from MIPS Technologies.

We continue to target a 23% non-GAAP operating margin for the full year.

Now as I mentioned earlier, we are targeting cash flow from operations of $170 million to $190 million, which does not include any impact from our tentative tax settlement with the IRS.

And in summary, we have completed a good quarter, and we are continuing to execute against our earnings targets in this ongoing challenging environment.

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

Thank you.

(Operator Instructions).

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

Please go ahead.

Hi.

Just a couple quick ones.

Aart, I may have missed this, I got on late.

Did you make any comment about how fiscal Q2 bookings came in?

And can you talk a little bit about whether or not, I know the environment still is tough but have you seen a material change from last quarter, or the same general environment?

Okay.

That's a complex question because -- let me start with the same general environment.

I would argue that the general environments have not fundamentally changed with the exception of obviously many of the semiconductor companies seeing some 'bounce off the bottom'.

Which was first attributed to inventory that had to be replenished, now it is being viewed as really the market trying to find a little bit more stable state.

And that stable state is not minus 38%, which is where it was a quarter ago but is more likely to end up in the minus 20% state or so for the year.

So in that sense the freefall is over for right now, unless there is another major economic disturbance.

And people are really starting to look forward to where is the industry now going, and how long will the recovery be?

And in general, the scenarios that I hear, and it is the only one we use from a management point of view, is to just assume that it will take probably a couple of years to come back to the levels it used to be in the middle of '08, let's say.

Within that, we have clearly seen that we had a very good quarter.

Overall as we look at the entire year, we communicated that we think that our bookings will be slightly below what we had planned.

But in all fairness, the plans were done in mid-'08.

So there are a lot of changes there.

And by the way, the bookings themselves are less relevant as really the overall run rate, which is slightly down going forward.

And that is also moderated by the fact that there has just been a few bankruptcies; a few people that are just very cautious right now.

If I were to summarize it, we actually feel that we are in an extraordinarily strong position as a company.

And that the magnitude of the recession is very deep.

And that it is only now, that many companies are planning how are they going to behave, and restructure the industry going forward.

And in that situation, I think we are in a very good position.

We are well aware that many companies are still very stressed.

Given the fact that 2010 certainly the top line will be driven in large part by what you do from a bookings perspective this year, your model is a little bit unique.

Any initial thoughts on 2010, assuming you execute on your revised booking objectives in 2009?

Is 2010, are you planning for a growth year on the revenue line first?

Anything you can say on 2010 would be appreciated, and maybe, Brian, you can touch on the license duration increase in the quarter?

Thanks.

So I think it is a bit too early to give guidance to 2010, because there are so many moving parts in the industry.

I think that the fact that the overall run rate is down slightly, is a piece of what we will take into account as we plan 2010.

But there are also many things that we can still do.

And the other thing is that we are certainly solidifying many relationships with customers that today wouldn't dream of spending more.

But as business returns, or as they find their new stability point, we will look at how can they improve their differentiation and efficiency.

So we do think that from that perspective, we are in a very strong long term position.

But as I said in my preamble, I said I think the return of the semiconductor industry or as a matter of fact of the entire economy is going to take more than just six months.

Raj, maybe to on the contract length as well.

The 3.4 years in the average contract length we closed in the quarter.

And it gave us a good perspective, based on the amount of activity we saw, about just how the quarter went.

But we put that in a context of a real tough recession out there, and it really just depends on the customer requirement for the software, the timing and the expansion of the agreements they have.

And it averaged 3.4, last quarter was 2.7.

I think in the long run it is very, very close to the three years that we set out for ourselves, and that is the length of our agreements.

Just during this recession, you are going to see a number of contracts may be shorter.

A number may be even longer.

It's just given it is such a unique situation out there.

That is really what I would highlight.

Thank you very much.

You are welcome.

Thank you.

Next, we move to the line of Matt Petkun with D.A.

Davidson & Company.

Hi.

Good afternoon.

Aart, you referred to maybe not wanting to talk about bookings as much as run rate this year.

Are you referring to run rate as far as it means in flows of new orders, or run rate in terms of your run rate in individual customer, maybe across the board all your customers are using less of your software?

Sure.

For starters our customers are using more of our software.

That is for sure.

And that is a good sign.

It is also clear that right now customers cannot spend more.

I mean, going to any customer today and say we want more money is just a ridiculous proposition in the midst of a massive recession.

At the same time though, we want to make sure that we maintain a healthy ongoing business profile, and for that, we use the term run rate, and you absolutely are right.

We are thinking about those from customer to customer.

The reason I have always cautioned about looking at just orders as a reflector is precisely following up on the answer Brian just gave.

Which is from one quarter to another, you can have the number of years go from 2.7 to 3.4.

And that is a big difference in orders, but may have no change whatsoever in run rate.

And so the very fact that there will be big fluctuations is a given in this landscape.

We were managing it very much around the center of gravity of about three years, because that is the way that we think to balance our business.

Okay.

Now as you stated, and I probably agree, your customers are using over time more of your software, but they not paying more.

What levers do you have to get paid more?

Well, I think that is a correct observation today.

And many customers will be very eloquent at formulating that we need to help them right now through this downturn, because if we do over time we will do better, and we partially agree with that.

At the same time though, it is right now that we are building a set of relationships with these customers that are moving I think quite far beyond the traditional, just selling them software.

As a matter of fact, most of our customers partially driven by the recession, are forced or see the opportunity to revisit their own productivity and predictability model.

And that is perfect for us because for the last few years, we have been aiming aside of trying to have the best possible product, to aim at getting the best possible overall results, at the best overall design cost.

And so focusing on design cost with the customer is the way we are engaging today.

And I think with that comes the opportunity, as they become financially more able to pay more, and to be back in business, to really play with us going forward.

And so we are really strengthening our position, notwithstanding the fact that in the midst of a deep recession, you don't go to your customers and say, hey, I am going to charge you more.

Okay.

In conjunction with this question, Brian, I am wondering if any changes have been made to the deals that you are signing today, in terms of maybe some of the cash collection terms, as well as, whether or not you are able to command as much, in the way of bundled maintenance in a given contract?

Okay.

Sure.

The bundled maintenance, by far, by far the majority of our business activity are the term licenses taken over time.

Our time based license agreements.

So therefore, all of the maintenance is bundled into that.

There a very small amount of perpetual licenses where actually maintenance is charged separately.

Those are typically three or four-year-old deals that were struck a while back.

It is basically embedded, and is that built into the pricing levels.

When we look at -- the first part of the question was around which part?

Just the timing of cash collection.

Yes.

The payments are up slightly from what we had scheduled earlier.

We track each one of them relative to how much cash is in the first year, second year or third year of the agreement.

It is up a little bit.

On a case by case basis, as we are looking at the customers going through some of their challenges, we track the payments specifically against their due dates, and considering to match that.

But again this quarter we hit 51 days of DSOs.

That is well within our range.

We have very detailed files, analysis, FRisk ratings, et cetera, on the credit positions of each of our customers.

And finally really don't take revenue until we have a guarantee that the cash is going to come in.

We have almost written off no revenues at all in our history, and it is very carefully and conservatively managed, relative to the cash payments.

That is why with a slight decrease in our cash outlook, it is just really recognizing it is a real challenging environment out there with all companies relative to their cash.

And we are still in great shape, and just moderating it a little bit.

Okay.

Thanks so much.

And are we ready for the next question?

We are ready.

Thank you.

That will then come from Rich Valera with Needham & Company.

Thank you.

I would like to follow-up on the run rate discussion, Aart, excluding the couple of bankruptcies you referred to, how was the run rate?

Was it nearly flat?

Then as sort of a follow-up as well to the discussion of primary vendor agreements, just wondering what your historical track record is with increasing run rates when you sign a primary vendor agreement?

And how that has played out over the last couple you have signed here during this downturn?

Sure.

Well, I think the summary is actually the whole story, which is it is nearly flat.

So there are some people that can afford an increase.

There are some people that beg for a decrease.

In average we are doing very well, I would say, with that.

That is why I am saying it is a good indicator to be a little careful to not expect huge increases out of customers, at a moment where they just can't afford to commit to that.

But at the same time we are very bullish on the position that we are building with a number of customers.

We think that the very fact that we can provide a strong solution that is aimed at helping their overall cost equation, while not having to charge more for it today, is very attractive to our customers.

And just the other part of the question with respect to the primary vendor agreements.

What is your, I would assume historically that has implied an increase in run rate.

If you can confirm if that is true, and what has been your experience recently?

Has it been more of a flattish run rate, despite signing one of these primary deals?

I think your characterization is correct.

I would actually not say that there is such a big difference from where it was historically, to where it is today.

It is very often the case the primary agreement is really around the core of the technology that people need no matter what.

And then there are opportunities to upsell from there, as we solidify our position.

And there are opportunities for our customers to reduce their cost basis, by essentially focusing on fewer vendors that provide a more complete solution.

So the fact that somebody becomes one of our primary EDA partners has many other relationship ramifications that really I think bode well for the long term going forward.

But they include to be able to sell them more capabilities.

The objective is not here to reduce our total available markets, the objective is to increase it.

But it is also clear that the technical complexity and the interaction level needed to be successful has gone up.

And therefore working well with these customers bodes well I think for both them, most importantly, and hopefully for us as the business picture clarifies going forward.

Great.

And then a couple of questions on the guidance.

I guess this is for you, Brian.

You have a $30 million delta in your full year revenue guidance with only two quarters to go, which seems like quite a big range.

Given the predictability of your model, it would seem to go to the low end you would have to do almost no perpetual revenue, it would seem -- or up front revenue.

Question number one, why such a big range with only two quarters to go?

And number two, if you take your nine months EPS -- year-to-date EPS, back take away from your full year guidance, it looks like you are looking for $0.25 to $0.35 in the fourth quarter.

Trying to understand why that EPS number is so low in the fourth quarter?

Is that a new run rate or is there some unusual expenses in the fourth quarter relative to say the third quarter?

Okay, good question.

On the range itself, I think again we were one of those companies that does provide guidance.

A lot of people have kind of looked at it and we wanted to give a range that as we have traditionally done, keeps us within the boundaries of what we set out.

In a way you might call that conservative revenue.

And really relative to the trend we are seeing on revenues, it keeps moving along.

There is no anticipation of any major surprises.

It is just tough out there.

We are just watching the credit.

We are watching the situations with any consolidations happening amongst the semiconductor players, and other activities going on.

You are right.

We are highly predictable.

We just have our traditional wider range, and we only have two quarters left to go.

I just lock that into being a conservative position on it, but still seeming very confident that we will get through this within those ranges.

As I look ahead to Q3 and Q4, it is really just again the expense timing, relative to when those costs come in.

Relative variable compensation which for us typically picks up toward the third and fourth quarter, relative to the performance metrics that we have established for the Company.

And we have higher levels of confidence as we move toward the end of the year.

So I think again it is a pretty good profile that has allowed us to maintain our operating margins to increase even with the $0.04 dilution from the new acquisition, to actually increase the bottom end of that earnings guidance.

And come out for the year real tight against what we set up initially in an extremely tough environment.

So we are pretty proud of the expense management, and delivering the revenues as we expected to get in on the EPS numbers.

If I can ask that a little bit different way.

For the fourth quarter assuming you did flattish sequential revenue from the third quarter, which would be within your guidance.

The lower EPS would be due it sounds like to higher commissions perhaps, and maybe some incremental dilution from the MIPS deal?

Are those the two main contributors?

Those are both contributors.

Beyond just the commission piece, but the whole variable compensation which goes beyond just the sales team.

And again as we deliver, we will be accruing those expenses against our performance metrics for the year.

It really just builds up.

And trying to be conservative in the expense outlook, and again prepare us for 2010.

And to get our expenses as low as we can leading in.

And it is a typical fourth quarter for us, relative to the profile that we see every single year.

Okay.

That is helpful.

Thank you.

Thank you.

And we take our next question from Sterling Auty with JPMorgan.

Thanks.

Hi, guys.

Hi.

First question is, when I look at the jump in the average duration, if we look at the industry as a whole, there have been periods in the past where some vendors when you saw a jump in duration, it was because the environment was tough, and it was because of increased discounting.

Can you give just some description based on what is happening in pricing and discounting?

Because the predictability of your model, I thought that was the alleviation of having to get into some of those pressures.

Certainly.

First of all on duration, one of the reasons I am always hesitant should we release this on a quarter by quarter basis is because it is not meaningful data mostly.

The running averages are more meaningful, which are really around about three years.

Now sometimes people want to have a longer duration, because they essentially want to lock in pricing.

And feel that in a relationship, they don't want to be feeling subject to price changes when things move on.

There is a positive for us in that, in that people commit to us.

On the other hand we may argue the opposite, which is shorter durations are better, because now is not the time to ask for premium pricing.

And locking it in for too long is a negative.

The bottom line of all of that is, I think we are very cognizant of the dynamics in both dimensions.

And that is the very reason that in the last four or five years, we have actually been I think extremely systematic, to keep it sort of at roughly the same average.

Now having said that, there is no question that a number of customers right now are shifting their decision making to be more encompassing about some of the relationships they are going into.

And they are seeing that the complexity of design is demanding a degree of integration of the tools.

But also of the integration of the interaction between user and supplier that is different from the past to be successful.

And a number of companies are absolutely derisking their profile of suppliers that are using.

That is a benefit for us.

I think we are a safe bet.

I think we are better than a safe bet.

We have a number of technologies that will help them going forward.

And so the discussions about the length of the deals are not difficult.

It is really sort of what makes sense.

What is the timeline of what they have already running with us.

And a little bit of feel for, how do you minimize the degree of anxiety on both sides.

So it is the length of the deal is a nonevent in the negotiations.

It is not something we are pushing or pulling one way or another.

And then can you describe a little bit the linearity of the bookings through the quarter, you mentioned the improvement in terms of the inventory refresh, and there has been some discussions about layoffs possibly mitigating.

Can you talk about what you saw in terms of the linearity of bookings?

I think at the beginning of the quarter we already had a pretty good sense of what business was actionable.

And it fundamentally didn't change all that much during the quarter.

Now part of that is many of the companies we deal with, are well aware that they have to do cuts, or that the future is uncertain.

But also very well aware that they need to have a strong set of relationships with their key suppliers, to stay in business and do well.

And so the very fact that certainly initially in the downturn we saw people be very nervous making any commitment, just putting it on hold and given than many deals are three year deals that still have some time to run, there was no super urgency, I think we reported that first quarter orders were very low, compared to second quarter which was essentially normal.

And so I think we are sort of back to normal business, in a still very not normal economy.

Got you.

I got the $0.04 dilution from the acquisition, but I missed if you said it.

Did you actually tell us what the revenue contribution expected, and what the revenue model on the acquisition looks like?

No, I didn't say that.

You didn't miss anything.

What we said was it is not material to our next year.

And that we thought 2010, the impact of this latest acquisition would be slightly accretive in balance.

We typically go through haircuts on deferred revenues and things like that.

Don't see it as a major item, and we are factoring that into the guidance and expenses and revenue for the balance of '09.

And everything we said includes those metrics.

Thank you.

Thank you.

And once again, ladies and gentlemen, (Operator Instructions).

And we will take our next question from the line of Raj Kumar with RBC Capital Markets.

Hi, guys.

Thanks for taking my question.

Do you feel that the EDA spend by your customers spend has actually lagged the other cuts that are made in other segments?

And as a follow-up, even if the semi customers' revenue declined for this year is not going to get any worse, do you feel that the EDA spending cuts might actually accelerate as we go through the middle of the year?

Well, I think there are two comments to that.

First, by definition they are lagging because many of our agreements are multi-year agreements.

With the exception of customers that essentially go completely out of business, where you would feel the effect immediately for most of the other customers.

Aside of the pleading for help, there is not much that occurs.

Now having said that, going forward, as some of the customers relook at their relationships, sign up some primary vendor relationships, I think we will see some shift in spending.

But on the positive side, there is no question that as many customers have gotten out, more and more out of manufacturing, and are paying more and more attention to differentiation in design, there is an opportunity for us to really have impact there.

And one of the reasons I mentioned earlier why I am enthusiastic about some of these key relationships is because we are essentially strengthening a long term relationship around the core offering of the Company.

But there is also opportunity to upsell from there, once their economic outlook starts to brighten up.

And there is no question that from a technology necessity, they will need a lot more technology.

So the opportunity is there.

Okay.

Since the start of the downturn, can you characterize how many new relationships you have locked up, either with customers whom you did not do much business with or selling new tool sets to old customers?

As a follow-up, my impression from your answers to previous questions was that while so far you haven't seen a distinct increase in the contract size, even when you increase the size of the relationship of the customer, you are hoping to better these customers as the economy picks up?

There are many questions in your question.

Let me start with new customers.

There are very few truly new customers, partially because today we touch virtually every electronics company in the world.

And as you can imagine the number of startups right now is rather limited, and the number of people that are going to spend a lot of money from scratch is essentially nil.

Having said that, there have been a few startups and there have been a few companies that we have gotten into because of the interest, some of the new IP, we had some of the prototyping capabilities.

So some of the new products that we have are finding traction in places that before we didn't necessarily touch.

Now regarding the main players which are really the big companies where we seek to have profound long-term relationships, in general I would say that spending overall has not really gone up.

Because there is no way they will spend more right now, at the very time where they are trying to cut costs in many dimensions.

At the same time though, it is also not practical for them to just cut the costs, because they are either in existing contracts, or they have a very real need for all of our products.

We are not going to give our value away for free.

And so I think the joint objective for both these crucial customers in the industry and ourselves is to say how do we both work on a better future?

And the better future says how do we make you more efficient from a true overall productivity and product development point of view.

In other words, let's put a dent in cost of design because that will make them more competitive and that will make us more relevant to them.

And in that context, for example we introduced a very exciting product, Lynx, which is essentially a design flow that has been enabled for the customer to over time start really optimizing for productivity.

And so it is a different level of interaction with them already, and I think all of those things really bode well, and we are essentially investing for post-recession, if you can call it like that.

Okay.

On the matter of the lower bookings run rate, can you comment on how much of the lower run rate is because of company bankruptcies, and how much of it is because of the slightly lower average contract size of the surviving companies?

I don't know the exact number.

Probably about half, or something like that.

Or rough numbers.

And there have been a number of bankruptcies.

I can't say that is overwhelming the picture.

That would not be correct.

Maybe the other aspect that has seen some marked pressure is the services.

And that is not really a surprise, because if you are a company that with a mandate comes top-down, cut costs, what does everybody do?

The first thing they do is to look at anybody who is not employed in the company and cut their service, or their short-term contracts.

Actually we have seen a slight rebound on that this quarter.

Again let's not overemphasize these things.

I think we are in the noisy phase of the recession turning into recovery, and the very reason we communicate a certain degree of caution, is because we have seen these before.

And when people hit bottom, they make it sound as if the end of the tunnel is here.

I think the reality is the recession will take some time to work out.

But knowing that reality, I think we can really take advantage of it for the long term.

Lastly.

What is going to be the earning model for the analog IP that you acquired from MIPS, is it up front, or will that also be subscription based?

The IP is more upfront than certainly the software, because in the vast majority of the situations it is essentially a perpetual license with some restrictions.

So the perpetual license may be only for a project, or only for a product family, or only for some period of time.

But essentially it is in simple terms, you get paid when it gets delivered.

In that sense, most of what comes out of the new acquisition will probably follow exactly the same profile.

The other comment I would like to make, is what we are taking there which is some fabulous technology in that acquisition, we want to make really, really sure that it also fits the Synopsys quality profile.

One of the reasons that we have built such a good IP franchise, is because we have really overinvested in verification with our IP, which is really necessary.

And so it will take a little bit of time to fully absorb this into Synopsys.

But we are very excited about it, because it also ties well to our rollout of Custom Designer, which is of course, the other area that is very exciting.

Because it is an area that is on the implementation, we had no position.

So that means there is only upside there.

Okay.

Thanks, guys.

Thank you.

And ladies and gentlemen, we are at our five minute mark, and we do have a question now from the line of Sterling Auty with JPMorgan.

Please go ahead.

Thanks.

Hi, again.

How would you characterize, I think we talked at the end of last fiscal year coming into this fiscal year that you had a relative basis a little bit weaker renewal opportunity set, at least in the beginning of the fiscal year.

How would you characterize the amount of business that is coming up for renewal in the coming couple of quarters.

And when do we get to the point where maybe the renewal opportunity starts to improve to help offset some of the economic malaise that we are in?

If you don't mind, let me just disagree with your premise.

The number of people that keep talking about renewal cycles is just amazing because to us that is not the key driver to our business.

The key driver is the renewals are spread over roughly three years, and the renewals tend to be about three years.

And so if a renewal is early a quarter or two, or late a quarter or two, it has no impact on the revenue whatsoever.

However, there are some changes if you renew early or later, which is can you sell additional capabilities?

Can you change the relationship and so on.

And what we see is that in a time of high uncertainty, such as right now, different companies react differently.

There are some people that immediately stop thinking about renewals, because they have so many other challenges.

Other companies that think no, now is the time to cut a deal, and maybe it is cheaper.

And yet other companies that think hey, you know, now is the time to really rethink strategically where we want to be in two or three years.

Who will be our key partners, and how do we make sure that we have both safety in our relationships, but also a highly leveraged relationship going forward?

And we see all of those.

And that is why all of these talks about renewals and length of deals tend to be so noisy.

The principals are very basic, old school, business principles.

Understanding that reasonably well, we have taken an approach of saying, let's be with the customer on their most fundamental questions.

Which is, how do they over the next two years improve their business picture by becoming on one hand more streamlined economically, on the other hand, more competitive with additional differentiation.

That is the dialogue that we have with all of the people that we now have these broader relationship with.

And it gradually morphs how we think about our own mission, notwithstanding that on a day to day basis, we will fight to create the best possible individual product.

So I don't actually even know that there would be any difference in renewal numbers or key pieces from one year to another.

The exception being one or two companies that tend to be very large.

Even there, there is a high degree of variability.

Right, but I think the reason we still focus on it is, while it may not matter dramatically to the revenue run rate as you spread it out, it does give an indication -- it has an impact on cash flow.

At least in the recent past, given how you guys collect.

Sometimes cash flow is also an important valuation metric in the sector.

The question is, if you get to a point where some of the renewals pick up, maybe we see cash flow moving in in the other direction.

That could point to improved health.

Actually you are starting to make an excellent point, I hadn't thought about that.

Your point is absolutely correct.

You can see one additional reason why people sometimes don't want to make any moves, because they don't want to engage any cash at the moment, where they are holding it as much as we can.

You point is actually well taken, and I had not thought about it that way.

That is fair.

Thanks guys.

Thank you.

And presenters, I will turn the conference back over to you at this time.

Thank you for attending this earnings release.

As usual, Brian and I will be available for some comments and clarification afterwards.

We do think that we are in a very good position, in a very unique time environment.

And we actually are quite excited about the momentum of the Company.

And hopefully we were able to give you an objective and balanced perspective of both the market and our situation.

Thank you for your time.

Thank you.

Ladies and gentlemen, that does then conclude our conference for today.

We thank you for your participation, as well as using AT&T's Executive Teleconference Service.

You may now disconnect.