新思科技 (SNPS) 2009 Q3 法說會逐字稿

Ladies and gentlemen, we thank you for standing by and welcome you to the Synopsys Inc.'s earnings conference call for the third quarter of fiscal year 2009.

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

Later, we'll 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 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-Q for the fiscal quarter ended April 30th, 2009, and in our earnings release for the third quarter of fiscal year 2009, issued earlier today.

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

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

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

Good afternoon.

I'm happy to report that we again made excellent progress towards our year's objective.

In Q3, we demonstrated solid financial results, substantial technology advances and continued customer momentum.

Summarizing our financial results, we delivered above target non-GAAP EPS of $0.47, with $345 million in revenue.

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

We continued our focus on cost control and we exited the quarter with a very strong cash position.

Turning to the economic environment around us, we see that bankruptcies are subsiding, that inventory corrections are driving increasing activities, and most importantly, that the natural level of consumption is gradually stabilizing the semiconductor market.

That said, forecasts are now on average that our customers will end 2009 with revenue down about 15% to 20%.

While semiconductor executives are cautious in a still-uncertain economy, and expect a gradual recovery, lasting into 2011.

Accordingly, at Synopsys, we are planning for continued industry stress through 2010, although we see a great opportunity to further strengthen our competitive position as customers focus on the best, most reliable long-term options.

Given this backdrop, we have assertively managed our business to not only adapt to the downturn, but also to take full advantage of it.

Expense controls are offsetting marginally weaker revenue.

We are driving long-term segment share shifts with customers moving to us, and we continue to make aggressive technology investments, all focused on reducing our customer's total cost of design.

For fiscal 2009, the result is that we've been able to adjust expenses to offset slightly reduced revenue expectations and provide earnings in excess of our original targets for the year.

We're also increasing our operating cash flow forecast to reflect the improved customer collection environment.

We expect to exit this fiscal year with a slightly down revenue run rate.

From an orders point of view, contracts are now renewing closer to the end of their duration as customers are still cautiously delaying decisions.

Contract length, though, remains stable.

While durations fluctuate a bit from quarter-to-quarter.

We continue to see the average range around three years.

The aggregate customer's trust and commitment to Synopsys (inaudible) the recognition that we are providing them several clear advantages.

First, a continuing stream of technology advances.

This quarter we again delivered substantial new capabilities to our customers.

Second, a global support organization that materially impacts the success of IT design, as we help customers achieve better chip sizes, speed, power, yield, and most importantly, meet difficult schedules.

And third, an intense focus on the total cost of design, which can be considerably improved by integrated EDA solutions with links to manufacturing systems and sophisticated ID bars.

In each key semiconductor companies, such as Exar, Intel, Marvell, National Semiconductor, Panasonic, Renaissance, Toshiba, Wolfson and others are counting on us to be their primary EDA partner as they drive forward the products that will carry them out of the recession.

Technology leadership is critical in this equation, and in Q3 we again delivered great new value to our customers.

Starting with our Galaxy implementation platform, we introduced brand-new in design physical verification capability with IC Validator.

This is remarkable as the in design integration lets customers diagnose and fix issues, [during] place and route, long before final sign-off.

Thus, minimizing disastrous schedule delays.

In June, we also shipped a complete new Galaxy release with extended multi core features throughout the flow and enhanced low power performance.

Our customers are seeing notable success.

Insignia, for example, used IC Compiler to take out the lead product of their high-performance automotive microcontroller platform.

At a recent design and submission conference, several customers, including Toshiba, Renaissance and Samsung described the excellent results using Galaxy and the in design capabilities integrating IC Compiler with [Synopsys] sign-off and physical verification.

Our goal is for these successes to result in segment share gains.

And while shifts occur gradually, I can tell you that we're actively replacing competitors at a number of important customers.

The central theme remains the same.

Technology differentiation and risk reduction.

One effort that precisely fits that description is the collaboration we announced last month with Arm and the IBM Samsung chartered common platform.

Together we are developing a comprehensive new solution for high volume mobile applications at 32-nanometer.

The tight integration of advanced processors, connectivity, IP, manufacturing technology and a state-of-the-art design flow will be instrumental in reducing costs and time to market.

Turning to verification, our discovery release also included many new advanced features in both digital and analog.

In Q3, we released CustomSim for unified analog simulation.

It combines the speed and accuracy of what used to be three separate tools into a single, flexible, easy to deploy solution.

We delivered Multicore Technology in our core VCS Functional Simulator, resulting in a 2X speedup.

Given that the simulator is used in the majority of the advanced chips in the world, a speedup of this magnitude has major economic impact as customers are able to reduce expenses for costly computer hardware.

Turning to our strategic investments, we continue to see excellent progress in both analog mixed signal implementation and in our IT system space.

Custom Designer, our new analog mixed signal design solution, went into general availability in June, with two major new features, schematic driven layout and advanced analog simulation environment.

Customers can now complete full analog mixed signal designs using only Synopsys as evidenced by two take-outs in the quarter.

Interest has been significant with requests for demos and evaluations exceeding our capacity to fully handle at the moment.

To support the deployment of technology models through open standards, TSMC announced the availability of the first 65-nanometer interoperable process design kits or IPDK for short.

The IPDKs are based on the open access standards and work seamlessly in our products.

Moreover, TSMC also announced that they have chosen Custom Designer as their IPDK development and validation platform.

Moving to our IT business, last quarter's acquisition of the Analog Business Group from MITS has generated great feedback from our customers.

The integration is right on track and added a rich library of analog IT as well as HDMI connectivity cores.

We continue to do well in this business and again introduced significant new products in Q3, including several connectivity titles and key power optimization IP.

In addition, we were the first Company to achieve certification for a USB analog (inaudible) of 32-nanometer.

Finally, tying it all together at the high end, our system solution is also progressing well.

At DAC, we demonstrated our newly integrated virtual platform, and FPGA-based rapid prototyping solution.

Developed to accelerate embedded software development.

Customer reaction to our technology momentum has been extraordinary.

During the quarter, we had record-breaking user group attendance at a number of events.

Most notably was well over 2,000 attendees in our India meeting alone.

In summary, Synopsys continues to execute well amid the uncertainty around us.

We're actively working with customers to help them successfully navigate the recovery and in turn, are positioning ourselves for even greater strength in the future.

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

Well, thank you, Aart, and good afternoon, everyone.

In my comments today, I will summarize our financial results for the quarter and provide you with our 2009 guidance.

As a reminder, I'll be discussing certain GAAP and non-GAAP measures of our financial performance and we provided reconciliations in the press release and financial supplement which is posted on our website.

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

Now, as Aart highlighted, Q3's financial results were solid.

We delivered bottom line growth, expanded non-GAAP operating margins, and generated considerable operating cash flow.

Let me now provide some additional details on our financials.

Total revenue was $345.2 million, within our target range, and with greater than 90% of Q3 revenue coming from beginning of quarter backlog.

Our IP and systems business performed particularly well this quarter, driven primarily by our digital and analog IP cores.

This of course includes the very small revenue contribution from our acquisition of the analog business group from MITS technologies.

Even excluding this transaction, business was quite robust.

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

Now, turning to expenses.

Total GAAP cost and expenses were $284.1 million, which included $11.4 million of amortization of intangible assets, and $14 million of share-based compensation.

Total non-GAAP costs and expenses declined 4% to $251.9 million, and were below our planned range, despite absorbing the analog business group acquisition.

The decrease was driven primarily by timing of quarterly expenses such as variable compensation, as well as Company-wide cost control.

As a result, non-GAAP operating margin was 27% for the quarter.

Q4 operating margin is expected to decline sequentially due to lower revenues and traditionally higher Q4 expenses, driven primarily by variable compensation.

This is consistent with the quarterly expense profile we outlined entering the year, and similar to year ago trends.

While quarterly expenses can be lumpy, due in part to the timing of large transactions, for the year, we continue to expect total expense growth to be slightly less than our targeted revenue growth, even with our recent acquisitions.

Turning now to earnings.

GAAP earnings were $0.32 per share, down from $0.39 a year ago.

As you recall, Q3 2008 GAAP earnings included a one-time $17.3 million tax benefit associated with the IRS settlement for fiscal years 2000 and 2001.

Non-GAAP earnings were $0.47 per share, exceeding our target range, and includes the slight dilution from our recent acquisition.

Our non-GAAP tax rate was 26% for the quarter, and for the entire year, we continue to expect a non-GAAP tax rate of approximately 27%.

Our revenue visibility remains strong, with greater than 90% coming from beginning of quarter backlog.

Upfront 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 2.8 years.

Now, turning to our cash and balance sheet items.

We ended the quarter with $1.08 billion in cash and short-term investments.

Of this balance, 55% is held within the United States.

We generated $232 million in cash from operations in the quarter, including an expected annual payment from a large customer.

We are raising our operating cash flow target for the year to approximately $190 million to $210 million, driven primarily by an improved customer collections environment.

This target does not include any impact from our tentative tax settlement with the IRS that we detailed last quarter.

While still subject to further approval by the Federal Government, we would expect the settlement to result in cash payments of approximately $50 million over the next 12 months, which would be fully offset by tax benefits 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.

Now, continuing on with our cash and balance sheet items, capital expenditures were $9.9 million in the quarter.

For the full year, we expect CapEx to be approximately $35 million to $40 million, including some additional Q4 expenditures as we consolidate our Bay Area facilities.

While this is a slight upward revision to our original target range, it's roughly flat with last year.

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

Recall that we acquired the Analog Business Group from MITS Technologies during the quarter, in an all cash deal, funded from our US cash balance.

As always, we will evaluate the best uses of cash each quarter, including Company operations, investments, and stock repurchases, and at the same time, we value the flexibility that our cash provides.

Q3 net accounts receivables totaled $136.8 million, and DSOs declined 15 days sequentially to 36 days, reflecting the high quality of our current accounts receivable portfolio and the timing of invoices.

Deferred revenue at the end of the quarter was $618.6 million.

We ended the quarter with approximately 5,990 employees, an expected increase due primarily to the analog business group acquisition.

While we have selectively grown our headcount, primarily through acquisitions, more than a third of our total employees are located in lower cost geographies.

Now moving on to guidance.

For the fourth quarter of FY 2009 our targets are revenue, between $335 and $343 million, reflecting some caution regarding a level of upfront and turns business.

Total GAAP costs and expenses between $297 million and $313 million, which includes approximately $15 million of share-based compensation expense.

Total non-GAAP costs and expenses, between $272 million and $282 million.

Other income and expense, between 0 and $3 million.

A non-GAAP tax rate of approximately 26%.

Outstanding shares, between 146 million and 149 million.

GAAP earnings, of $0.14 to $0.21 per share.

And non-GAAP earnings of $0.29 to $0.33 per share.

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

As a result, our fiscal 2009 outlook is revenues of approximately $1.357 billion to $1.365 billion, representing growth of about 1.5% to 2%.

Other income and expense, between $11 million and $14 million; a non-GAAP tax rate of approximately 27%.

Outstanding shares, between $144 million and $146.5 million.

GAAP earnings per share, between $1.16 and $1.23, which includes the impact of approximately $58 million in share based compensation expense.

Non-GAAP earnings per share of $1.71 to $1.75.

We have increased the low end of our guidance range by $0.09, and the top end by $0.03.

As I mentioned earlier, we are targeting cash flow from operations of $190 million to $210 million which does not include any impact from our tentative tax settlement with the IRS.

We will provide 2010 guidance in our next earnings call in December, reporting Q4 results.

In summary, we continue to manage the business well in what is a difficult economic environment.

I'm pleased with our consistent execution and solid financial results highlighted by operating margin expansion and solid cash flow generation.

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

Thank you.

(Operator Instructions).

And we'll take our first question from the line of Raj Seth with Cowen and Company.

Please go ahead.

Hi, thank you.

Aart, can you talk -- you don't talk explicitly about bookings, but how, even qualitatively, how have bookings come in here in Q3?

I think last quarter you suggested that Q1 was weak.

Q2 I thought was closer to your expectations.

How's the bookings environment feel?

How have bookings been coming in, even qualitatively, if you can make any comment?

We don't give any quantitative comments, but qualitatively, I would say we are back to expectations.

The Q1 was extraordinary, just because almost every Company was in shell shock and just delayed all decisions.

I think we're now back to a business as usual, with one difference from the past, which I alluded to, which is that all the contracts tend to go a little bit longer towards the end of the contract.

Which actually very reasonable behavior, given the situation and given that the contracts that we are closing are coming in just fine.

I think this is exactly the type of situation for which we are well equipped.

So run rate, I think last quarter you talked about it being annualized run rate sort of at par or slightly below, same general trend?

Yes, that has not changed.

Partially because we're really reflecting what happened early into the year.

I remain a little bit cautious about will there be further consolidation or change in the semiconductor industry, but at the same time, I also see a number of signs that people are definitely seeing some light at the end of the tunnel or at least preparing for that.

You mentioned some incremental caution on some of the turns business that you would normally see in Q4.

What's driving that, or is that a minor effect?

I think it's a minor effect.

It's more that in a situation where people live with uncertainty, are cautious, turns business can be easily delayed by a day, a week or a month.

And if those happen to be the dates that cross the boundary of a quarter, one tends to be a little bit more sensitive to that.

However, the quality of our business model is such that we enter the quarter with a high degree of confidence in our revenue.

And so it's really just on the margin, I would say.

One last one, if I might.

Brian talked about strong balance sheet.

You've got $1 billion in cash.

You've talked for some time, and I think it's been clearly the smart decision to preserve optionality.

You stopped buybacks and you've sat on the cash.

At what point do you start considering buybacks again?

You've got clearly excess cash sitting here.

What triggers a decision to maybe begin to deploy that cash rather than just sit on it.

Well, we actually make that decision every quarter.

So this is not something that you just put on the shelf for a long period of time.

I think you got correctly the fact that we looked at having option in our option space.

We have that.

I think there's still many changes to come in the industries around us.

So right now, we like the fact that we have a high degree of freedom of what we want to do but there's also no question that buyback could be one of the things that we can use the cash for.

Thanks.

You're welcome.

Thank you.

And we'll take our next question then from the line of Matt Petkun with DA Davidson.

Hi, good afternoon.

Couple of questions from me.

First, just when I look at the sales and marketing line item, Brian, you've been running consistently at rates at or in this quarter below last year's rates on a year-over-year basis.

Is it fair to say that you've made some structural changes and we could expect that maybe you're getting a little bit more leverage out of that group?

And obviously some of it relates to the bookings activity this year versus last year.

But more directly, I'm wondering how we should think about that number moving into Q4?

Yes, Matt, I'd say the majority of the reasons on the quarter-to-quarter profile, as well as the increase projected effectively in the fourth quarter is related primarily to variable compensation and we indicated again that is one of the factors there relates to not only it's tradition in the fourth quarter.

Not only there, we look at the fourth quarter and this fourth quarter will actually be lower than last year's four quarter and we forecasted along the lines.

So I'd just say that's the primary area of variation from quarter-to-quarter, it's on variable compensation.

We're also seeing some really significant improvements on the travel areas, we're down about 40% year-over-year as well as below our budget on travel savings and benefits.

So again, just focused at this level of business to optimize on margin and cash flow.

Okay.

Great.

And then Aart, looking at this analog IP business, it's obviously early days, but I'm wondering if any of the conversations you've had, do you see any opportunity to maybe pull through some of your -- some digital design opportunities, especially in the areas of wireless video?

Well, Matt, this has absolutely been a very good buy for us because not only does it add a substantial catalog of analog IP blocks, it also adds some very strong IP designers, and very few people know that we have over 450 analog designers within Synopsys at this point in time.

So right here, at a minimum, there's a strong incentive to make sure that our analog tools do very well within the Company.

Having said that, this was one of the acquisitions where I got an inordinate amount of unasked for positive feedback from customers, almost right away.

And what that tells me is that, A, they were really looking at the Company as having an opportunity to strengthen the products that they were getting and go further with that, and B, that there is a strong desire to see Synopsys take a stronger position in that direction as well.

And yes, it has some impact on the tools going forward, although I think that will take a little bit longer time.

Okay.

And then just one other question, Brian.

You said that some of your guidance for Q4 was related to upfront, your caution on upfront and turns based business.

Are you saying that you think that bookings could be delayed and so the upfront portion and the turns portion of that business could be affected?

Because when I look at your upfront revenues in general, they've been relatively stable the last three quarters in a tougher environment.

Yes, you're exactly right.

The impact on the business from quarter-to-quarter, again, we're discussing here pretty slight variations from one to the next, built into the guidance, and as you saw in the third quarter, 95% of the quarter coming over from the previous quarter in terms of bookings and visibility, we're in a real strong position.

So we're just dealing with that extra 5% and our commitment is when we provide that guidance, we're looking at what we've already got booked for the quarter as well as anticipation.

So good performance on the time-based licenses continuing, each quarter-to-quarter, and just a little bit of caution around the deals that we're going to close where we'll be able to take revenue on those deals in the quarter.

So as you know, if they closed at the very end of the fourth quarter, then there's very little revenue associated with that and we're just cautious relative to timing, as Aart said.

As customers are effectively waiting in some cases until the end of their contracts to be renewed, and we say when they renew them, not if they renew them, that it's, again, has an impact slightly on the revenues and we just need to be cautious as we look at the fourth quarter.

So just to be clear, when I'm looking at the potential for sequential decline in revenues, that would be the upfront portion recognized in time-based licenses, is primarily where you're seeing that?

Is that correct?

No, it's actually the time-based licenses is pretty solid, actually.

It's just the line called upfront revenues itself.

Okay.

So you know, break it down between upfront and time-based licenses and the sequential decline there is in that upfront portion, just associated with the type of transactions and you can see it's a small number anyways.

But that amount of variability that we have some visibility to now in the quarter is where we would anticipate the decline.

Thank you.

You're welcome.

Thank you.

We take our next question then from Rich Valera with Needham & Company.

Please go ahead.

Thank you, good afternoon.

Aart, your prepared remarks you mentioned that you expected the exit the fiscal year at a slightly lower I think you said revenue run rate, which is the first time I specifically heard you call that out.

As we've been parsing between upfront and time-based, I'm trying to understand where is the lower revenue run rate coming from?

Is it because of the lower bookings that happened in the first quarter or two or is it something that you're seeing more recently, like this concern over upfront that you're talking about in the fourth quarter?

Sure, let me clarify.

First, when we look at the revenue, there are multiple components to that.

What we refer to as the revenue run rate, which is not really a very, very firm number, because it's difficult to actually calculate it, is essentially a measure of repeatability of all the large contracts.

And so the only reason that the revenue run rate is slightly down is because early in the year there were a number of companies that frankly just disappeared, meaning there were bankruptcies, there were companies that went out of business, and part of that was in our backlog, part of that were going to be renewed and they're gone.

Having said that, we have seen a complete decline of those, actually I'm not even sure that there were any bankruptcies in Q3, now that we're talking about it, and so this has gradually improved during the year and we wanted to make sure that people understand that the semiconductor industry is still in the beginning of recovery mode.

It is not massive recovery, partially because what you see is mostly from inventory correction.

Having said that, overall, the future does look a lot better than certainly the last three or four quarters and we are in a very solid position.

So this was to give you a sense of how we look at the business, exiting what we see de facto as probably a two, two and-a-half year recession and we have many other things that we can do on top of the existing revenue run rates and that we will do to grow the business from there.

Okay.

So your last couple sentences there were intriguing, but sounds like sort of all things equal, without any acquisitions, presumably, you would expect 2010 to be a down revenue year from 2009.

I know we don't want to get into guidance, but sounds like that's kind of what would be implied by your run rate statement.

Well, as you said, we don't want to go get into guidance right now.

I think we are trying to make sure that we don't get ahead of making predictions too quickly, on both the basis of what happened early in this year, which gives some caution, but also on the basis of how things feel right now, which feel much more positive and the fact that I think we're executing particularly well.

You may recall, if you look way back in some of our earnings releases, that probably about four or five quarters ago already, I warned that we were going to start paying more attention to expenses in light of potential revenue shift if there was a recession.

There's been obviously a massive recession.

I think we're sailing through this with flying colors, as a matter of fact, and the very fact that we will deliver growth in 2009 according to the guidance we just gave I think is a solid sign for that.

So we're just trying to be very complete in how we let you know about the picture without wanting to give guidance, before giving guidance.

And just the fact that we had I think outstanding results in Q3 shouldn't let us dance on the table yet.

This is an environment that's tough.

I think Synopsys is executing particularly well.

You mentioned TSMC rolling out the IPDKs which would seem to be a boon for folks like yourself trying to break into the analog design space.

Could you give us a sense of what your sense is of how significant those are.

Folks have been trying to use open access and Pi-cells for a while to sort of break into established cadence accounts.

What do you thing the IPDKs might mean for that effort?

Well, in general, all fields go through evolutions and that is true for the analog field.

It's true for many other fields.

The Open Access Coalition and efforts have been some very, very good efforts for many years that actually were pioneered by Cadence who have added a lot of value to that, and this is not any different than Synopsys many years ago, pioneering many of the other access formulas around digital design, because we all know very well that our customers use a number of tools from a variety of sources that have to work together.

Simultaneously, it's also clear with the smaller geometries, it's more and more important for the availability of libraries to not only be there for all of the tools, and also not become too costly and be complete in terms of the technology turns and so the IPDKs are really the next evolution that the industry is signing up for and the fact that TSMC is leading the pathway in providing the data is a good sign because they are by far, by far the largest foundry in the world, and so we all rely on the quality of the models they provide.

So IPDKs is a very good thing.

Okay.

Thank you.

Thank you.

And we'll take our next question then from the line of Sterling Auty with JPMorgan.

Yes, thanks.

I want to circle back, Aart, to the comment that you made in your prepared remarks about the stress on the industry and I wanted to get some clarification.

So you're seeing the improvement, inventory replenishment in semiconductors, you mentioned that they need to feel confident in the improvement before you start to see some improvement in your own business.

I want to make sure.

Did you say that stress would continue into 2010 or to 2010?

Because it would seem to me that if they see a decent back half that they should start improving their spend and demand in the beginning of 2010.

Yes, let me start by saying let's not over-stress the fact.

I'm not the Oracle on what's going to happen in the semiconductor industry.

I may talk to a lot of people but it's a hard industry to completely predict.

What I meant to say is actually through 2010, meaning that if you look at the present semiconductor industry, just to give you some rough numbers, the first quarter it shot down 38% and that's where everybody sort of hit the brakes.

Then it shot back up by virtue of inventory replenishing and many short-term orders.

Now the expectations, and the jury is actually still very much out, the expectations are for the semiconductor industry to end at about minus 15% to minus 20% down from let's say 2007, 2008 and I can certainly confirm that that is the gut feel that I'm getting from all the execs I talk to.

After that, the semiconductor industry will most likely behave like it always did which is ups and downs but a gradual return that some have said would go all the way to 2013.

I think it's much more likely that it's to 2011.

In other words, 2010 is a gradual recovery year.

How do people behave in such a situation?

Well, in such a situation, they have clearly seen that there's been a big disruption in the past year.

They have clearly seen that a number of companies did not do well.

Others have gained strength, but it's not visible yet, and most likely there will be some consolidation or rearrangement of the industry.

So during that time, those that have hard needs will absolutely spend more, but most others will just sort of try to lay low a little bit in their expenditures, and I think that they will focus a great deal of spending more with those people where they can simultaneously save somewhere else, and therein lies some of the opportunity for us, because we touch more than DDA budgets.

We touch the total cost of design.

So what we have tried to do is to increasingly focus our interaction with customers on the basis of the overall economics, and that, by the way is a great opportunity that has been accentuated by the recession which is we talk to high levels in companies about their economics instead of the details of cost capacitants coupling somewhere in some tool.

And so the picture I try to project is one that says we, Synopsys, have a great opportunity to really strengthen and broaden our position, while at the same time setting up a growth pattern for the future that is predicated on knowing that people have to simultaneously be cautious in their expenditures.

Okay.

Next question actually is for Brian, based on your comments.

We look at it, your total expenses were $14 million below the midpoint of the guided range for non-GAAP expenses.

How much of that coming in below was that variable component that you mentioned?

Oh, most of it.

I don't want to say all of it here, because there have been a lot of very good actions taken by the team on minimizing compensation and taking the right actions to keep the spending rate low that we indicated we would do at the beginning of the year.

But the rest is really just timing that's going to be moving into the fourth quarter, as I was indicating and you would anticipate Q1 drops as it has pretty well every year from the Q4 levels just based on the timing of variable compensation related to commissions, any incentive plans and so on in place and very traditional flow.

Okay.

Help me reconcile, if most of that came from variables coming in lower, that would suggest to me then actually your bookings in the third quarter were below what you anticipated when you gave guidance last quarter.

Well, we indicated a couple things last quarter and we're reiterating this quarter, that contracts are renewing closer to their expiry date and again, as you know with our business model, if the contract hasn't expired yet, it does not have an impact to our revenue profiles and we're in a great position to work through the best thing, provide the best value to the customers and the right thing for Synopsys.

And if it closes at the end of one quarter, it's fine.

If it closes three days later and flips into the fourth quarter, that's fine too.

But it's something that we're watching and certainly it's been a trend we've seen throughout the year of closing off the agreements, closer to the expiry of them itself.

So we'll work it through.

There was a little bit of a shift in those deals that moved into the fourth quarter and that's what we factor into our plan.

Again, we're tracking through great financial results for the year.

Last question is on cash flow.

Based on the cash flow guidance you gave for the full year, it would indicate the lowest fourth quarter cash flow you've generated since 2002 or any collection.

So if you had maybe some of the bookings slip into the fourth quarter, did you see actual collections get pulled forward and collected earlier than you would have thought?

I'd say most of it was really from a returning level of confidence with our customers and as we got through the first quarter, that was the highest level of uncertainty and the highest level of announced bankruptcies, slow payments and so on and then we saw the second quarter again coming back to a stability level and with more confidence returning in the third quarter, that there appears to be a sense of recovery that the customers were very good on paying exactly on their due dates and we've got very deep relationships with them so the cash in-flow came in stronger in the quarter and as a result we're able to increase our operating cash flow levels as we indicated, just based on better performance, more certainly around collection and more confident as we go into the fourth quarter that the collections an the spending profiles will be properly managed, both sides of it, to generate increased operating cash flow for the Company in 2009.

All right.

Thank you.

Thank you.

Thank you.

Our next question comes from the line of KC Raj Kumar with RBC Capital Markets.

Hi, guys.

To pick up on the question on cash flow, can I conclude that the strength in cash collection is a sign that the customers are actually loosening up their purse strings?

Was the improved collection coming from just a few customers or was it more broad-based?

Well, it's increasing confidence, and cash flow on expected dates from the scheduled customers that we had scheduled through the agreement.

As you know, we take all of our backlog and profile that in terms of revenues going forward and cash to be collected forward by customer, by quarter.

The customers paid as expected.

Again, just based on the relationships we've been able to build up and there was far less activity related to slow payments and announcements of bankruptcy.

Still, a couple of small ones.

Overall, the performance was again stabilizing this quarter, and a slight level of improvement going forward.

So they just paid per the terms in the agreements, nothing in advance, and very little in arrears of their expected dates.

Okay.

Does that answer?

Yes.

Sort of a broad question on trying to understand fiscal 2010.

Would you at least say that your top line will be in the same direction as sort of the customers, meaning that if the customers are going to see an upturn, that will be the same direction that you would expect your top line?

Yes, I think you're asking us for guidance for 2010 which we don't want to give yet.

I think generically the answer is yes, because we do follow the semiconductor industry.

The reason one should not answer your question with yes is because the semiconductor industry moves with incredible ups and downs.

In aggregate, the stability of the semiconductor is actually quite good.

But quarter-to-quarter or even year to year, it can easily bump from plus 20 to minus 20 and whereas we would love to take the plus 20s, I don't think we want to take the minus 20s, which we just saw, by the way.

Maybe just to characterize, some of many of the questions I've just heard in the last few minutes, both in terms of cash, in terms of orders, in terms of business profile, I do think that the -- our customers are in aggregate more confident that things are solidifying, and, therefore, are moving back a bit more to business as usual.

It's just that the business as usual right now is not at the same level as it was at 2007 and 2008 yet and that will take some time and so if you take those comments in conjunction, you would have to say well, that's actually a great opportunity for Synopsys, because with the massive downturn, we have been able to hold the fort, so-to-speak, meaning that we've done very well, and with the expected upturn or return, we have an opportunity to build on the strength that we have carefully cemented over the last year and-a-half this was happening.

And so we see actually great business opportunities, it's just that just like nobody was really capable of completely calling the downturn in Q4, Q1, one cannot really completely call the upturn exactly either.

Okay.

You folks talked about taking advantage of the downturn and looking to have positive shifts towards you guys.

Is it fair to assume that for the coming couple of years at least, that your top line would outgrow that of your peers?

Well, the part of the challenge with that statement is that many people have gone through model changes.

However, what I can say is I think that we have a model that is incredibly solid but more importantly than that is that model is now built on a product portfolio and a customer penetration that is very, very solid.

And so that allows us to build on top of that basis going forward and the fact that we now lead the industry and have an opportunity to really help customers that are trying to save money while at the same time spending well with us, I think is a great opportunity for us for further growth going forward.

Okay.

Lastly, on OpEx, have you guys unloaded most of your temporary saving measures?

I'm sorry, I didn't understand the question.

The temporary savings, have most of them been unloaded?

I'm not sure which temporary savings you're talking about.

What we have done is systematically go through the Company and prioritize all the savings that we could do.

Some are obvious things that one should do.

Some are things that one can do if there was a worse recession or what have you.

Luckily for us, we've been able to do very well with a number of things that have reduced our day-to-day spending.

I think Brian mentioned already the travel which is a very visible example.

But also making sure that we invest in those areas that have or have a return going forward.

We expect to continue that behavior.

So far from me to say that there's not more places that we can save but it's also clear there's opportunities for us to invest, be it in R&D, be it in M&A, be it in special support situation of customers that we can help through the downturn and all of those are essentially building for the future.

We're doing all of those.

Okay.

Thank you.

You're welcome.

Thank you.

(Operator Instructions).

We'll go next then to the line of Paul Wick with J&W Seligman.

Hi, guys.

Could you just talk about the uptick in maintenance and services on the income statement?

And whether that's -- what was the cause of that and whether it's sustainable?

Sure, Paul.

I'll take that one.

The slight uptick in terms of the service revenue that's up year-over-year and up sequentially, it's driven by a couple of large consulting contracts that we had in the quarter and to a much lesser extent the new acquisition we had with Chip Idea.

So we had a number of the contracts.

They're in the IP area specifically where we have multiple deliveries.

The Company's been working on them for some time, and completed those in the third quarter, allowing us to take revenue on all of the deliverables.

So it is a little bit of a catch-up.

It does fluctuate from quarter-to-quarter, based on the milestone completions, but it's part of the elements that contributed to it in the third quarter specifically.

So it's not exactly consistent quarter-to-quarter, it just depends on those big consulting deals that we do.

Okay.

Thanks.

You're welcome.

And we take a question from the line of Rich Valera from Needham & Company.

Thanks.

Just wanted to follow up on the run rate question, Aart.

My understanding now is you've said that it sounds like the lower run rate is largely due to some bankruptcies, customer bankruptcies early in the first half of your year but that things are more stable now.

I just wanted to clarify that in fact the run rates your seeing on renewals are close to flattish or whatever you were referring to X the bankruptcies you were referring to in the first half.

Is that correct?

We don't quantify the run rate number for a variety of reasons.

I think your statement is very correct.

That was the clarification I was looking for.

Thank you.

You're welcome.

And we have no further questions at this time.

Presenters, I'll turn the call back to you.

Well, thank you again for attending this quarter.

I think that in an environment that is to say the least very interesting, we feel that we're actually faring very, very well and have been able to take advantage of some of our strength and will continue to play those out going forward.

As usual, Brian and I will be available for follow-up questions the next few hours.

Thank you.

Have a good day.

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